Why Steve Jobs should be punished for the options backdating chicanery at Apple. And why he won't be.
Over the past years, the intrepid duo of James Bandler and Charles Forelle at the Wall Street Journal have helped unearth dozens of examples of options backdating at companies large and small. Their investigations of the dishonest practice have led to the resignation of dozens of top executives and investigations by the Securities and Exchange Commission and federal prosecutors. But the options scandal has never touched a more exciting company than Apple or a more thrilling executive than Jobs.
Here's what's happened so far. In June 2006, a special committee of Apple outside directors, chaired by former Vice President Al Gore, hired its own attorneys to investigate options backdating at the company. The committee filed a report on Oct. 4, and on Dec. 29, Apple discussed the report and accounted for the impact of the earnings restatements in its 10-Q.
The report, which leads with the highly convenient conclusion that there was "no misconduct by current management," doesn't reflect well on Jobs.
It turns out there were literally thousands of examples of backdating at Apple—6,428 options grants on 42 dates over a period of several years. After accounting for forfeitures, Apple was forced to recognize stock-based compensation expense of $105 million on a pretax basis that it hadn't done so previously.
Apple has essentially blamed former chief financial officer Fred Anderson and former general counsel and board secretary Nancy Heinen, both of whom are no longer with the company. But Apple makes clear that Jobs was directly involved in some instances of backdating. The investigation "found that CEO Steve Jobs was aware or recommended the selection of some favorable grant dates." The committee hastens to add that Jobs "did not receive or financially benefit from these grants or appreciate the accounting implications." In other words, he didn't recommend backdating his own option grants. Still, given that (a) backdating helps make earnings look better than they are; and (b) Jobs is a huge shareholder of Apple (10.12 million shares, as of last April), how could he not benefit from this behavior?
It turns out that Jobs did, indeed, receive backdated options—just not at his own direction. On Dec. 18, 2001, when the stock stood at $21.01, the company gave Jobs a monster 7.5-million-share options grant dated Oct. 19, 2001, when the stock stood at $18.30. By doing so, the company gave Jobs $20 million in compensation for which it did not account properly. Fudging the date wasn't the only chicanery. It also pretended the options grant was approved at a special board meeting, when no such meeting occurred. Jobs did not know about the ghost meeting.
So let's review. Jobs recommended some backdating dates for other employees. He received a massive grant that was approved at a phantom board meeting, though he didn't know about the phony meeting. And he never cashed in those options because they were replaced in 2003 by a grant of restricted stock.
Daniel Gross is the Moneybox columnist for Slate and the business columnist for Newsweek. You can e-mail him at email@example.com and follow him on Twitter. His latest book, Dumb Money: How Our Greatest Financial Minds Bankrupted the Nation, has just been published in paperback.