updated 02:55 pm EDT, Tue July 11, 2006
Execs named in Apple suit
Apple executive officer Steve Jobs, former Apple executive officer Michael Spindler, and other executives of the company have been named in the most recent investor lawsuit over stock option grant irregularities and may be forced to return the funds they earned from grants received as part the Cupertino-based company's executive stock compensation plan, should the lawsuit succeed. The complaint filed last month in U.S. court for the Northern District of California on behalf of all Apple investors, claims that company executives and directors worked secretly together to backdate stock options in an effort to maximize returns on their options, breaching their fiduciary duties to Apple and costing the company millions in losses, according to AppleInsider.
Details of the lawsuit reveal that the allegations extend to the highest management levels, including former CFO and current board member Fred Anderson, iPod chief Jon Rubenstien, former CTO Avi Tevanian, current vice president of retail operations Ron Johnson, and current executive vice president and COO Tim Cook. The suit also names all members of Apple's current Board of Directors as defendants, with the exception of former vice president of the United States, Al Gore Jr.
The lawsuit claims that 18 executives and directors manipulated the option grant dates of specific stock options to maximize personal profits from the company's stock compensation plan, violating generally accepted accounting principles as well as its own stock plan approved by shareholders. The suit also claims that upper management intentionally provided false documentation to the Securities and Exchange Commission. Similar claims against executives of other companies have been raised by investor lawsuits and SEC investigations, according to the lawsuit.
The suit cites a recent analysis and investigation by The Wall Street Journal that describes similar stock option backdating methods by companies such as KLA Tencor, Comverse Technology, Vitesse Semiconductor, and Affiliated Computer Services.
The Apple investor lawsuit provides details on more than 12 stock option grant exercises by unspecified individuals in Apple's upper management from 1993 through 2001, claiming that the stock grant option dates were retroactively changed to provide the highest compensation for the company's executives, according to the report.
The Journal claimed in mid-March that similar and apparently "fortuitous" patterns of stock option grant strike prices at Vitesse were unlikely due to chance, but rather a result of backdating -- a conclusion which the Journal supported by its own analysis, saying that the chance of such a pattern emerging was around one in 300 billion, or roughly twice as unlikely as winning a multi-state Powerball lottery.
The suit claims that similar "extraordinarily remote" patterns are seen when looking at Apple's own financial records. "In a striking pattern that could not have been the result of chance, each and every one of the foregoing stock option grants was dated just after a sharp drop and just before a substantial rise in Apple's stock price," the suit reads.
The lawsuit compares the stock prices of executive stock option grants between the years of 1993 and 2001, looking at the stock prices 10 days before and 10 days after each option grant date. The data shows a remarkable pattern of all gains -- between 1.5 percent and nearly 50 percent on the series of grants, while none of the exercised option grants showed a loss within the first 10 days after each grant date, indicating that stock was always exercised before a peak in stock price.
"The odds that the pattern of the fortuitously-timed stock option grants exhibited by Apple is the result of chance are similar to, if not greater than, the one in several billion or more odds described by The Wall Street Journal," the plaintiffs claim in their complaint. "The actual reason for the extraordinary pattern exhibited by Apple was that the Office Defendants' stock options were improperly backdated."
The lawsuit seeks to recover the "millions of dollars of damages" sustained by the company as a result of the backdating, the proceeds gained by the individual defendants who received the grants, the plaintiffs' legal fees and any further relief the Court deems proper, according to AppleInsider.
Apple board not impartial
The suit also claims that Apple's current Board of seven members is unable to act as an independent oversight committee for investigation and prosecution of the alleged breaches of fiduciary duty. The suit contends that six of the seven board members -- all except former United States Vice President Al Gore -- are not "disinterested" parties, as many of them have participated in the backdating either as part of the company's Compensation Committee (Campbell, Drexler, Levinson, and York) or Audit Committee (Campbell, Levinson, and York), or are directly affected by the stock option grants (Jobs and Anderson), or have approved false documentation to the SEC (Anderson, Campbell, Drexler, Jobs, Levinson, and York).
Apple issued a press release admitting that an internal investigation had discovered irregularities related to the issuance of certain stock option grants made between 1997 and 2001 less than 24 hours before the suit was filed.
"Apple is a quality company, and we are proactively and transparently disclosing what we have discovered to the SEC," said Apple CEO Steve Jobs. "We are focused on resolving these issues as quickly as possible."
The suit also names senior vice president Guerrino De Luca, as well as former company officers which include Ian Diery, James J. Buckley, Daniel L. Eilers, G. Frederick Forsyth, Robert Calderoni, and Mitchell Mandich.