Shares of Apple Computer fell as much as 6% today after a legal publication reported that federal prosecutors are probing whether former company executives forged documents to maximize executives' stock option profits.
The Recorder, a San Francisco-based publication owned by American Lawyer Media, reported late Tuesday that federal prosecutors are looking into forged documents at Apple related to administering stock options. The report cited people with knowledge of the case who requested anonymity because the case is the subject of criminal and civil government investigations.
Apple spokesman Steve Dowling said the company is providing the SEC with the results of its internal investigation into stock options practices, but had no further comment.
"Any time you get the stock options probe mentioned, especially with rumors of falsifying documents, the hot money tends to shoot first and ask questions later," said Tim Biggam, options strategist at Man Securities, an options brokerage firm in Chicago.\
The publication also reported that CEO Steve Jobs has hired his own outside counsel separate from the company's legal team.
Analysts have downplayed the effect that the probe could have on Apple's business.
But they have said that their biggest concern is that the investigation could lead to the departure of Jobs, a company founder who has been lauded for turning around Apple by launching blockbuster iPod digital media players and revamping its line of Mac computers.
In October, Apple's board said that in some cases Jobs had been aware that stock options had been backdated. It cleared him of any misconduct, saying that he did not benefit from the grants and had been unaware of the accounting implications.
"People have sort of ignored the possibility that Steve Jobs could be in trouble and might have to leave the company given the options problem. I think the news today confirms that is a risk," said Benjamin Halliburton, managing director at Tradition Capital Management. He and his firm do not own Apple shares.
"But the flip side of that is Apple's core business is doing extremely well," he added.
Apple is one of nearly 200 companies that have disclosed SEC, DOJ or internal investigations for potential backdating of stock options. Backdating refers to retroactively pegging the strike price of an option to a day when the stock traded cheaply. Options with low strike prices are more valuable to their owner because they are less expensive to exercise.
In the October statement, Apple said the internal investigation raised concerns about how two former officers recorded and accounted for stock options. Citing people with knowledge of the investigation, The Recorder also reported those two former officers were General Counsel Nancy Heinen and Chief Financial Officer Fred Anderson.
On Dec. 15, Apple said it was delaying filing its annual report with the Securities and Exchange Commission due to its ongoing investigation into stock option grants. In a filing with the SEC, the company said it needs to restate historical financial statements to record charges for compensation related to past grants. As a result, Apple was unable to file its 10-K Form for the fiscal year ended Sept. 30 by the required filing date of Dec. 14.
Apple expects to file its annual report and its quarterly report for the period ending July 1 by Dec. 29.
HOW BACKDATING WORKS
A stock option allows the option holder to buy shares at some point in the future for a fixed price. The option price is almost always based on the stock's price the day the option is granted. Backdating involves manipulating the issue date, often after a run-up in the price of the stock, so the option becomes more valuable for the holder. In some cases, executives have been awarded options backdated to the day the stock hit a low for the quarter.
http://www.usatoday.com/money/industries/technology/2006-12-27-apple-options_x.htm?csp=26
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