Apple Announces More Options Troubles

fremen writes "Apple today announced that they will be withdrawing their financial reports back to September 29, 2002 and delaying the filing of future reports after finding more backdated options problems. Companies backdate their stock options by looking back over a period of time and choosing a historical low as the option strike price. While not illegal, this must be fully disclosed to investors and properly accounted. Expect more uncertainty in the coming weeks as regulators must now uncover how much of Apple's record profits were incorrect as well as whether or not Steve Jobs will be able to continue leading the company."

Comments

Re:Isn't this an issue for the CFO

[jkrise]

It appears CEO Jobs was a possible beneficiary of a cancelled transaction, that's being admitted by Apple:

Apple said in June that one of the stock option grants was to chief executive Steve Jobs, but it was subsequently canceled and resulted in no financial gain to Jobs.

So this is an issue for the CFO AND the CEO as well.

Re:Who?

[simong_oz]

The CEO (and the entire board) is still accountable and if financial wrongs are found, the directors could be barred from being directors of any company. However successful Jobs might be, if he is legally barred, he can't be on the board (of any company). All speculation of course.

Re:Schadenfreude

[droyad]

Well.. it really only ever got borrowed from German:

Schaden = Damage
Freude = Enjoyment

In this case the literal translation is accurate, it's enjoying something (someone else) being damaged.

Re:Steve Jobs leading Apple

[ThePhilips]

Provided that would be found any serious problems and Jobs would be found to be related to the problems.

For financial stuff public companies have CFOs - chief financial officer. It's not responsibility of CEO to overview SEC reports - it's responsibility of CFO.

In other words, I beleive Peter Oppenheimer (?, if Google's not lying) as current Apple CFO has more to lose.

Re:Steve Jobs leading Apple

[cpt kangarooski]

The Securities and Exchange Commission has jurisdiction only over publicly traded companies.

That is not true. Any securities traded in the US fall under their jurisdiction. They just tend to be more interested in companies that are, or are going, public.

Re:Isn't this an issue for the CFO

[bobdotorg]

They're options, so cancelling them cannot result in a benefit to the issued party.

Re:Steve Jobs leading Apple

[cpt kangarooski]

Your post is also not true. The SEC has jurisdiction over all securities transactions. This includes both public and private offerings and actual transactions. When a private company grants stock, or even discusses granting stock, to private investors, employees, directors, etc. the SEC has authority over it and regulates it. The earlier poster is wrong, and so are you.

Re:Steve Jobs leading Apple

[Ohreally_factor]

That's incorrect. Jobs "came back" to Apple when NeXT acquired Apple for -$400 million dollars in 1997.

Re:Apple, Meet Orange

[Ohreally_factor]

but the iPod simply requires that you use proprietary software to transfer music onto it--not uncommon for peripheral devices, and not anticompetitive

This is no longer the case. There are third party and Free applications for the iPod now. Check out rockbox for iPod replacement software. Personally, I like the software that came on my iPod and iTunes just fine, but there are lots of options out there.

Re:Step by step

[shawnce]

Actually backdating is legal as long as it is approved by the companies board, revealed to stock holders and correctly accounted for.

What is backdating?
Many companies, it now appears, allowed executives, board members, and other employees to look back over the history of their company's stock price movements and pick a date in the past on which they wanted their options to be granted. Thus, the executives could, and did, guarantee themselves a profit by selecting a date on which the stock price was very low. The options allowed the executives to buy stock in the future at the old, low stock price.

What are the rules governing backdating of options?
Companies are free to give employees the right to purchase stock at whatever price the company wants, but they are supposed to reveal those actions to investors and deduct the costs of the options from profits. Until the Sarbanes-Oxley Act of 2002, companies were free to give employees options, and not deduct the cost from profits, as long as the price at which the employee could buy future stock was the price set by the market on the day the option was granted. Now, companies must deduct even the costs of those options from their profits.

If companies are free to backdate options, why are companies coming under SEC scrutiny?
Many companies, it turns out, hid the backdating from investors and failed to subtract the costs from their profits. Lying to investors can be grounds for criminal prosecution by the Justice Department and civil penalties by the SEC. These actions may also mean the companies filed inaccurate tax forms, which could cause the Internal Revenue Service to demand fines and penalties.

http://www.usnews.com/usnews/biztech/articles/0607 21/21options.htm

Re:Steve Jobs leading Apple

[lerxstz]

I think he said "...milk the Macintosh for all it's worth and move on to the next big thing" (IIRC)

Re:Steve Jobs leading Apple

[Anonymous Coward]

My take on the article is that the overstatement of profits is significant

Significant? How did you get that?

The incorrect numbers in the profit calculations are from incorrect accounting for stock option grants because of dating. In other words some percentage of the option grant's cost wasn't accounted for correctly because of the stock value related to dating of the grant. The amount of impact this can have on prior quarter numbers is not significant, it simply cannot be due to how small relative to all other operating costs stock grants are. (granted some quarter it may affect more then others)

This in all likelihood with show minor changes in quarterly profit numbers ... really a tempest in a teapot.

Jobs options

[cvdwl]

If this really bothers you, I'll take your apple stock.

For those determined to pillory Jobs for this, I might suggest reading this sfgate article which says, in part:

Some of the nettlesome stock options were given to Apple CEO Steve Jobs, but he voluntarily canceled those in 2003 before cashing them in.

After digging deeper, Apple uncovered enough new problems to prompt the company to hire an outside lawyer to take over the investigation and notify the Securities and Exchange Commission about its findings.

Valuation of stock options is and has been under a lot of debate recently. Apple looked over its books, discovered they had done something wrong according to current (and possibly past) accounting practices, and went to work to correct the problem.

Steve Jobs, who is richer than Croesus and really only bothers to count the number of digits on his bank statement, decided to dodge potential trouble more than TWO YEARS ago, which helps their position now.

Which part of this fits the "Steve Jobs is a greedy corporate raider" theory?

They screwed up. They admitted it. They'll take a hit. These aren't the droids you're looking for.

Options Backdating != Enron

[KenSeymour]

The scale of this is much smaller than Enron.

Here is an article that explains how the options backdating scandal started:

http://www.businessweek.com/investor/content/may20 06/pi20060523_848601.htm

To summarize, a finance professor decided to calculate the return on companies for the 30 days
after the award on of options on an unusual date for such award. He looked at 1668 such awards
and found that those stocks did 5% better than average for those 30 days each time.
Later, the Wall Street Journal calculated odds of 300 billion to one that that would happen by chance.

So a red flag can be raised on a company by mining this data, but it doesn't prove that
backdating took place. The SEC has decided to investigate a bunch of these companies.
It is likely that they will find wrongdoing in at least some of these cases.

One interesting note was that this practice has been greatly reduced as of 2002, when Sarbanes-Oxley
required reporting of options awards within two days of the award.

The details of how options are granted determines whether they have to be shown as an expense or not,
so some companies involved are having to restate earnings.
The largest impact I'm aware of is UnitedHealth Group, which according to the above article may
have to report $300 million in additional expenses.

Enron was fraud on a massive scale to hide tremendous losses.

Backdating options is a lesser fraud that puts more money in the pockets of executives.
It does not imply that the companies involved are not making money.
It also hasn't been proven for any company, yet.