The revelation led to anxiety in the investment community because Apple is one of the most glamorous companies in the industry, riding high on the worldwide success of the iPod and led by charismatic CEO Steve Jobs. A high-profile board includes former US vice president Al Gore.
Jobs is among a number of top Apple executives who have been named in class action lawsuits filed against Apple by shareholder groups as having profited from stock-option grants, and he will be at the center of attention as the inquiry progresses.
However, as a reminder of how far-reaching the stock-option problem has become, Apple’s audit committee of outside directors likely to be investigating the scandal includes William Campbell, chairman of Intuit Inc. This accounting software vendor is conducting its own review of its own stock-option practices and has been asked for information by the SEC and has been served with a subpoena for documents from the US Attorney for the Northern District of California.
Apple said it would delay the filing of its 10-Q report for the quarter to July 1, which would put Apple in danger of de-listing, though Nasdaq regulators would be reluctant to stop trading in a company with a market value of $55.9bn.
While the company announced at the end of June that it had found evidence of irregularities, this was related to grants made between 1997 and 2001. With the discovery of additional evidence of irregularities, Apple said it will need to restate its historical financial statements to record non-cash charges for compensation expense relating to past stock-option grants.
With the investigation by an independent counsel still continuing, Apple said it has not determined the amount of such charges, the resulting tax and accounting impact, or which periods may require restatement. However, it has warned shareholders in an SEC filing that accounts for fiscal years ended 2003, 2004 and 2005 and the last two quarters should no longer be relied upon.
Apple shares dropped 1.85% to $68.30 following the revelation, wiping a billion dollars off the value of the company. However, Apple is a notoriously volatile stock and its share price has yo-yo-ed between $42.02 and $86.40 in the past year.
Until the final results of the investigation are revealed, it will not be known to what extent senior management were complicit in the irregularities and to what extent they benefit.
When Apple announced in June that it had discovered irregularities, it admitted that one of the grants was to CEO Steve Jobs. However it said it was subsequently cancelled and resulted in no financial gain to the CEO.
Jobs said at the time: Apple is a quality company, and we are proactively and transparently disclosing what we have discovered to the SEC. We are focused on resolving these issues as quickly as possible.
The penalties for transgressions in stock-option grants can be enormous. Brocade Communications Systems Inc’s former CEO Greg Reyes and former vice president of human resources Stephanie Jensen are facing jail sentences of up to 20 years and fines of up to $5m if found guilty of criminal charges brought by the attorney for the Northern District of California.
Last year software quality and IT governance specialist Mercury Interactive Corp fired CEO Amnon Landan, CFO Douglas Smith, and general counsel Susan Skaer following a report which claimed they had knowingly and unfairly profited from misstated stock options grants. It was subsequently delisted from Nasdaq for late filing.
The blow to a company’s reputation is enormous. Hewlett-Packard Co bought a weakened Mercury for $4.5bn in July. Flash memory vendor Msystems, which had to restate its accounts because of stock options problems, was recently acquired by SanDisk for $1.37bn.
RSA Security Inc, which said on June 13 it had received a subpoena from the US Attorney for the Southern District of New York requesting stock options records from 1996 to the present, was bought by EMC for $2.1bn on June 30.
As three of the 29 companies caught in stock-option probes have already been acquired, stock market predators will be running the rule over other companies for whom the restatement of accounts and raft of class action law suits are a huge distraction from running their business.
Apple at least has the size and history of success to be impervious to a takeover threat, not least because its future and that of Jobs are inextricably linked.
