SEC prepares to move on options case
Federal securities regulators are getting ready to file charges in a case involving the backdating of stock options, the chairman of the Securities and Exchange Commission said Monday.
According to CBS Marketwatch, SEC Chairman Christopher Cox said the agency would make an announcement "very soon" but didn't name a company or provide a more specific date.
Prosecutors and the SEC are probing several companies, including Apple, whose executives received options in company stock at low prices just before big jumps in share prices.
"For some period of time now, it's been abundantly clear that these are not merely episodic instances," Cox told reporters at the SEC following a summit about protecting senior-citizen investors from fraud. The chairman said that "widespread problems" have existed, particularly during the 1990s.
Two lawsuits uncovered by AppleInsider this month combine to charge nearly two dozen current and former Apple executives and board members with colluding to backdate stock options in order to maximize the return on those options. The majority of the charges pertain to backdated stock grants during the 1990s.
Among those Apple executives charged in the suits, which were both filed in California courts, are Apple chief executive Steve Jobs, former chief financial officer Fred Anderson and executive vice president Tim Cook.
According to CBS Marketwatch, SEC Chairman Christopher Cox said the agency would make an announcement "very soon" but didn't name a company or provide a more specific date.
Prosecutors and the SEC are probing several companies, including Apple, whose executives received options in company stock at low prices just before big jumps in share prices.
"For some period of time now, it's been abundantly clear that these are not merely episodic instances," Cox told reporters at the SEC following a summit about protecting senior-citizen investors from fraud. The chairman said that "widespread problems" have existed, particularly during the 1990s.
Two lawsuits uncovered by AppleInsider this month combine to charge nearly two dozen current and former Apple executives and board members with colluding to backdate stock options in order to maximize the return on those options. The majority of the charges pertain to backdated stock grants during the 1990s.
Among those Apple executives charged in the suits, which were both filed in California courts, are Apple chief executive Steve Jobs, former chief financial officer Fred Anderson and executive vice president Tim Cook.
Comments
Originally posted by godrifle
This could be very very bad.
Stever better release Reality Distortion Field with an eight core woodcrest powering that baby.
I bet they nab some crooked accountant.
Does anyone think that Apple will be better off if Steve Jobs is charged and forced to resign as CEO? Will that do anything good for shareholder value?
Originally posted by bryand
Does anyone think that Apple will be better off if Steve Jobs is charged and forced to resign as CEO? Will that do anything good for shareholder value?
As far as we know, the SEC hasn't even established an informal inquiry into Apple's options-granting practices--it's been Apple so far that's done the investigating. So, for the short term, it's unlikely that "this could be very bad," as I significantly doubt the SEC is ready to bring charges against Apple at this point.
As for punishment, I'm with you there: a fine seems far more likely, or at best the formation (at the company's expense) of an external council monitoring corporate practices or something. If the SEC did try to hardline it and force Jobs from the top, investors would have to sue the SEC!
Originally posted by Wings
Someone please explain exactly how this hurts the stockholders.
Backdating is not necessarily illegal if each and every one of the following conditions hold true:
* No documents have been forged.
* Backdating is clearly communicated to the company's shareholders. After all, it is the shareholders who effectively pay the inflated compensation that typically results from backdating.
* Backdating is properly reflected in earnings. For example, because backdating is used to choose a grant date with a lower price than on the actual decision date, the options are effectively in-the-money on the decision date, and the reported earnings should be reduced for the fiscal year of the grant. Because backdating is typically not reflected properly in earnings, some companies that have recently admitted to backdating of options have restated earnings for past years.
* Backdating is properly reflected in taxes. The exercise price affects the basis that is used for estimating both the company's compensation expense for tax purposes and any capital gain for the option recipient. Thus, an artificially low exercise price might alter the tax payments for both the company and the option recipient. Further, at-the-money options are considered performance-based compensation, and can therefore be deducted for tax purposes even if executives are paid in excess of $1 million (see Section 162(m) of the Internal Revenue Code). However, if the options were effectively in-the-money on the decision date, they might not qualify for such tax deductions.
Unfortunately all of these conditions are rarely met, making backdating of grants illegal in most cases.
Originally posted by SpamSandwich
Pasta fazoola! (pardon the spelling
Pasta fagioli. Now you know.
Originally posted by Wings
Someone please explain exactly how this hurts the stockholders. Say Stevie is given 1000 option shares and the company chooses the best date to put on them -- of course which happens to be the date of lowest share price -- he STILL would have 1000 shares to sell regardless of the initial value of that stock. It seems to me that the only person it would affect would be Steve and no one else.
Backdating options without shareholder approval is stealing from the shareholders. All of the cash from the lower strike price comes from company coffers, i.e. from shareholders' pockets. This is real theft, not "pseudo-theft" like copyright violations and stuff.
And the board of directors is supposed to protect the shareholders, but when they have their hands in the till themselves, then the SEC has to step in.
I would be pretty pissed if I was a majority shareholder and found out about this kind of thing there - somebody would be going to jail, and a civil lawsuit would be launched to recover the money.
Originally posted by e1618978
Backdating options without shareholder approval is stealing from the shareholders.
A company needs more than just shareholder approval to backdate legally. See my post for more details.
Originally posted by bryand
They say that the SEC's mandate is to protect shareholders. Duh, isn't that the job of the company directors? Once again, they are going after a well managed company just because the directors are being well rewarded.
Does anyone think that Apple will be better off if Steve Jobs is charged and forced to resign as CEO? Will that do anything good for shareholder value?
Of course its the job of the directors. And the SEC's mandate is to make sure the investors aren't taken for a ride by the directors.
And, I don't know. Do you think Enron was better off without Ken Lay? I don't think so, since they're generally dead (well, so is Lay, but that's not the point, either).
And I second the comment regarding theft. Shareholders are owners of a company. If a company pays out stock options, they cover the cost, and the lower the price, the more the cost, thus taking money away from the owners. One could argue that this is what's wrong with stocks and corporations. The ones running the show don't own the company, and thus could care less if they pillage it of all value. Esp. since if they get kicked out, they're set for life with their golden parachute.
Originally posted by mdriftmeyer
What's pointless regarding this matter is the fact that this practice is technically not illegal but "frowned upon."
Well, actually it is illegal now. I recently got burned because my options agreement was stretched over the time when the law changed, specifically a reaction to the Enron scandal. No more back-dating options. So, you agreement date must be in line with the option price at the time. Really sucks for those working largely for options, to some degree I agree with the law, but it also limits small companies ability to offer compensation when they are cash poor. Obviously, though you shouldn't do it without shareholder approval, THAT is stealing.