Apple: Stock options possibly mishandled - East Valley Tribune: Business

Apple: Stock options possibly mishandled

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Posted: Thursday, June 29, 2006 3:52 pm | Updated: 3:03 pm, Fri Oct 7, 2011.

SAN FRANCISCO - Apple Computer Inc. on Thursday joined the crowd of Silicon Valley companies to acknowledge some stock options awarded to employees might have been mishandled - a problem that threatens to raise questions about the accuracy of past financial statements.

Without providing details, the Cupertino, Calif.-based maker of personal computers and the iPod music player said its own internal investigation had uncovered "irregularities" in employee stock options issued between 1997 and 2001.

The troublesome stock options included a batch that went to Apple co-founder Steve Jobs, but the chief executive canceled those awards in March 2003 before he cashed them in to realize a gain. Jobs surrendered all of his outstanding options in exchange for 5 million shares of Apple stock now worth $295 million.

Apple said it has hired an outside lawyer to spearhead an investigation into its past stock options and has notified the Securities and Exchange Commission of the problem.

The SEC has subsequently launched its own inquiry after other companies have raised a red flag about their past stock options. The U.S. Justice Department also has subpoenaed information from many companies suspected of rigging its stock options to lock in bigger windfalls for top executives and other employees.

Nearly half of the 57 companies that have disclosed stock option trouble are based in Silicon Valley and other parts of the San Francisco Bay area.

With Thursday's disclosure, Apple becomes the best known of the lot with a stock option cloud hanging over it.

"Apple is a quality company, and we are proactively and transparently disclosing what we have discovered to the SEC," Jobs said. "We are focused on resolving these issues as quickly as possible."

Apple has been paying Jobs a $1 annual salary for years while finding other ways to reward its iconic leader. In 2001, for instance, Apple gave him a $43.5 million Gulfstream V jet.

The stock option news, released after the market closed, appeared to jar investors. Apple shares surged $2.95, or 5.3 percent, to close at $58.97 on the Nasdaq Stock Market, then retreated by $1.42 in extended trading.

Most of the stock option investigations so far have revolved around a practice known as "backdating."

This occurs when a handful insiders retroactively decide to set a stock option's exercise price at an ebb in a company's stock price instead of pegging the exercise price to the prevailing market value at the time of the award.

Stock options become more valuable as the market price rises above the exercise price, so backdating fattens the recipient's profit.

Backdating stock options isn't necessarily illegal, but it can cause a company to improperly deduct employee compensation expenses - a misstep that could exaggerate profits and result in an underpayment of taxes.

If the backdating isn't properly disclosed, regulators also might interpret the action as a form of financial fraud, exposing companies to civil penalties and a raft of shareholder lawsuits.

Apple didn't say whether its stock option trouble involved backdating.

Meanwhile, two other Silicon Valley companies disclosed widening investigations into their previously disclosed backdating issues. Both Mountain View, Calif.-based Intuit Inc. and Foster City, Calif.-based Equinix Inc. said they had received Justice Department subpoenas seeking more information about their past stock options.

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