Ever since reading Steve Jobs phenomenal graduation speech at Stanford University in 2005 I’ve been a fan and a believer that he was a business leader with a solid moral center. But a startling front page article (subscription required) in yesterday’s Wall Street Journal regarding his possible role in options backdating at Apple has raised some questions.
The story up until now has been that, yes, Jobs was involved in the backdating of some options but that he did not “appreciate the accounting implications” of doing so. But a statement by former Apple CEO, Fred Anderson, on Tuesday following his settlement with the SEC regarding options backdating charges casts this into serious doubt:
The former Apple executive said he warned Mr. Jobs in late January 2001 – while Apple was in the process of backdating a grant – that the company might have to take an accounting charge if Apple didn’t price stock options to its executive team based on the date the board approved the grant.
The attorney’s statement also alleged that Mr. Jobs had misled Mr. Anderson by telling him that Apple’s board “had given its prior approval” to the grant when, in fact, it hadn’t.
This refers to a 4.8 million share options grant to Apple’s executive team in early February 2001. At the time of the final approval of the grant, Apple’s shares were trading at $21 but the options were backdated to January 17, 2001 when the stock closed at $16.81 immediately giving them a cash value of around $20 million ($4.19 per share * 4.8 million shares). By not recording this transaction properly Apple under-reported its actual compensation to these executives by $20 million!!!!
Another backdated options grant discussed in the article was to Jobs himself. The board finalized a 7.5 million share grant on December 18, 2001, when Apple’s shares were trading at $21.01 but backdated them to October 19 when the shares closed at $18.30 – immediately giving them about $20 million of cash value ($2.71 per share * 7.5 million)!!!! Again, by recording the grant as if it was all finalized on October 19th, Apple underreported its compensation to Jobs by $20 million.
By backdating these two options grants, Steve Jobs and the rest of his executive team seemingly stole about $40 million from Apple shareholders during years when Apple had net income of $65 million (fiscal 2002) and -$25 million (fiscal 2001) i.e. all of Apple’s profit during those 2 years!!!!!
UPDATE (Thu 4/26, 12:15pm PST): Kevin Kelleher has an excellent blog post over at GigaOM about what is likely to happen to Jobs as a result of these new developments: “Steve Jobs, saved by the rising stock”:
…. Jobs is unlikely to face any action from the SEC, even though Anderson’s statement is begging for a deeper probe.
He has become, more than any American businessman, an icon of success. It’s like throwing the golden goose under the train. There would be a massive revolt among Apple shareholders.
It was a similar case with Mark Hurd, who accomplished the near impossible by turning around H-P. When it became clear he was involved in the pretexting scandal, ethicists suggested he should step down. Shareholders said he shouldn’t, and they won.
It’s just the latest case of Truth vs. Power. The idealists always make their case thinking that people will care about truth and justice. But they never do. They only care about appearance and power.
Obviously, former CFO Fred Anderson and former General Counsel Nancy Heinen are getting railroaded. They didn’t do anything Jobs didn’t know about and do himself. But nobody cares about them. They’re not making people the kind of big money Jobs is. They’re not loved by the public the way Jobs is. And so, even though they are likely telling the truth, they won’t get justice. They’ll take the rap for the options backdating at Apple and Jobs will be untouched. At worst, he’ll make a little apology about making “some mistakes” long after the dust has settled and everything will be forgiven in an instant.