Judge dismisses shareholder backdating suit against Apple execs
A California judge on Wednesday granted Apple's motion for dismissal in a stock options backdating lawsuit brought against chief executive Steve Jobs and thirteen other current and former members of the company's leadership, but is allowing the investors to refile an amended complaint as part of a derivative suit.
The New York City Employees' Retirement System, acting as the lead plaintiff in the case originally filed in August of last year, alleged that Apple's issuance of 200 million improperly accounted for shares to executives and directors unjustly diluted the company's stock price.
However, as U.S. District Judge Jeremy Fogel of San Jose noted in his ruling, the retirement board acknowledged that Apple's stock price didn't fall as a result of the backdating, which is somewhat of a prerequisite for most shareholder claims against corporations in similar matters.
"[As] Defendants note, such dilution is not necessarily accompanied by economic loss in the form of a fall in the stock price. For example, a company?s stock might soar if it were to announce that it had secured the services of a leading executive by granting the executive a large number of options," he wrote. "While the subsequent disclosure that the options were backdated might require a restatement, without a discernible drop in the stock price there is no basis upon which to establish an injury to shareholders."
Apple said last year that its internal investigation into the company's backdating fiasco turned up 6,428 misdated stock-option grants issued between 1997 and 2002. However, it cleared Jobs and all other company executives of any wrongdoing, with the exception of former chief financial officer Fred Anderson and former general counsel Nancy Heinen. Both executives had since resigned from their posts at the company, with Anderson later settling with the SEC and Heinen going on to face federal charges in a case that is still pending.
In dismissing the retirement board's case against Apple Wednesday, Judge Fogel did so with leave to amend, meaning the board can refile in an attempt to establish that its claims are derivative if the organization can show that it has suffered an injury that is not dependent on an injury to Apple as a company.
"However, any derivative claims on behalf of Apple arising from the facts alleged in the Complaint likely would be subject to consolidation with the pending derivative action, In re Apple Computer Inc. Derivative Litig., Case No. C 06-4128 JF," Fogel added.
The judge explained that should any such amended complaint prove futile, the Court may order dismissal with prejudice.
The New York City Employees' Retirement System, acting as the lead plaintiff in the case originally filed in August of last year, alleged that Apple's issuance of 200 million improperly accounted for shares to executives and directors unjustly diluted the company's stock price.
However, as U.S. District Judge Jeremy Fogel of San Jose noted in his ruling, the retirement board acknowledged that Apple's stock price didn't fall as a result of the backdating, which is somewhat of a prerequisite for most shareholder claims against corporations in similar matters.
"[As] Defendants note, such dilution is not necessarily accompanied by economic loss in the form of a fall in the stock price. For example, a company?s stock might soar if it were to announce that it had secured the services of a leading executive by granting the executive a large number of options," he wrote. "While the subsequent disclosure that the options were backdated might require a restatement, without a discernible drop in the stock price there is no basis upon which to establish an injury to shareholders."
Apple said last year that its internal investigation into the company's backdating fiasco turned up 6,428 misdated stock-option grants issued between 1997 and 2002. However, it cleared Jobs and all other company executives of any wrongdoing, with the exception of former chief financial officer Fred Anderson and former general counsel Nancy Heinen. Both executives had since resigned from their posts at the company, with Anderson later settling with the SEC and Heinen going on to face federal charges in a case that is still pending.
In dismissing the retirement board's case against Apple Wednesday, Judge Fogel did so with leave to amend, meaning the board can refile in an attempt to establish that its claims are derivative if the organization can show that it has suffered an injury that is not dependent on an injury to Apple as a company.
"However, any derivative claims on behalf of Apple arising from the facts alleged in the Complaint likely would be subject to consolidation with the pending derivative action, In re Apple Computer Inc. Derivative Litig., Case No. C 06-4128 JF," Fogel added.
The judge explained that should any such amended complaint prove futile, the Court may order dismissal with prejudice.
Comments
let me guess the judge is a iPhone user LOL, or he just got screw like me with the new Zune2 and just want to send Msft a message that his not happy
There is a Zune2?
let me guess the judge is a iPhone user LOL, or he just got screw like me with the new Zune2 and just want to send Msft a message that his not happy
What?
"[As] Defendants note, such dilution is not necessarily accompanied by economic loss in the form of a fall in the stock price. For example, a company’s stock might soar if it were to announce that it had secured the services of a leading executive by granting the executive a large number of options," he wrote. "While the subsequent disclosure that the options were backdated might require a restatement, without a discernible drop in the stock price there is no basis upon which to establish an injury to shareholders."
With respect, I have to disagree. Shareholders should be concerned, not with the immediate value of their shares, but the potential value of their shares once the dilution is accounted for. The absence of an immediate devaluation is not a relevant factor to consider, as it is obvious that any profits, in the future, will have to be divided among a greater number of shares.
An illegal share allocation cannot be legalized by the absence of an immediate stock market reaction. Share valuations do not rest on a single factor, like the number of issued shares, and quite often, some factors mitigate the loss of value brought about by other factors.
Definitely a bad Court decision. Hopefully, it will be appealed.
With respect, I have to disagree. Shareholders should be concerned, not with the immediate value of their shares, but the potential value of their shares once the dilution is accounted for.
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Definitely a bad Court decision. Hopefully, it will be appealed.
Well, think about it. There has to be a cutoff for when shareholders can sue a company or they will sue for everything!! One cutoff is that there has to be damage to the share price. It is not the only limitation, but I think it is a reasonable one in the big picture.
I'm not a lawyer, but I think that one of the grounds for a civil suit in general is that you have to be able to prove that you suffered as a result. This would be kind of hard to do with Apple stock right now! I wish I was hurting with Apple's returns on all my stocks now!!!
Remember, it wasn't even the backdating that was the problem--it was the accounting or the reporting of that backdating. The ability to sue is there for investors who were being hoodwinked by the top officials. Do you really believe anyone would have complained about these decisions if they had known about them at the time? No, like all the other super valuable options that have been given out at Apple over the last 10 years, investors by and large would have said "OK, they deceive it."
No harm no foul. Case closed.
It doesn't fit into this discussion, but I just got the image of shareholders suing because Apple failed to introduce an xMac! Think of the harm done--they could be bigger than Microsoft!!
Well, think about it. There has to be a cutoff for when shareholders can sue a company or they will sue for everything!! One cutoff is that there has to be damage to the share price. It is not the only limitation, but I think it is a reasonable one in the big picture.
I'm not a lawyer, but I think that one of the grounds for a civil suit in general is that you have to be able to prove that you suffered as a result. This would be kind of hard to do with Apple stock right now! I wish I was hurting with Apple's returns on all my stocks now!!!
I think that's going too far though. In these cases, it's about people that were put in charge of acting in the shareholder's best interests but then deciding it's OK for them to take more money than they were authorized to take. It's great that the company still did well, but they also acted against the company's interest in helping themselves to more company money than the deal with the company allowed. If Jobs & Co wanted more money, then they should have renegotiated the deal rather than just take it and ask forgiveness later, which is an act of bad faith.
Stock backdating might seem like a victimless situation to you, but if they were given 1,000,000 options and fudging the date makes a difference in $2 a share, then that's $2M more that Apple had to pay when those options are excercised, or $2M in opportunity cost because a few officers got some sticky fingers. Even if the company is doing well, I think this sort of activity is like stealing from the company. Even if they did a good job, it's still like one of your kids deciding he'll take an extra $10 out of your wallet without your permission because he was a good kid that week.
With respect, I have to disagree. Shareholders should be concerned, not with the immediate value of their shares, but the potential value of their shares once the dilution is accounted for. The absence of an immediate devaluation is not a relevant factor to consider, as it is obvious that any profits, in the future, will have to be divided among a greater number of shares.
An illegal share allocation cannot be legalized by the absence of an immediate stock market reaction. Share valuations do not rest on a single factor, like the number of issued shares, and quite often, some factors mitigate the loss of value brought about by other factors.
Definitely a bad Court decision. Hopefully, it will be appealed.
Potential Value? Get real. There is no mathematical law to even remotely forecast the potential value of a stock with any certainty.
This complaint is frivolous and during this time frame a person's stock went up 8 fold or more.
With respect, I have to disagree. Shareholders should be concerned, not with the immediate value of their shares, but the potential value of their shares once the dilution is accounted for. The absence of an immediate devaluation is not a relevant factor to consider, as it is obvious that any profits, in the future, will have to be divided among a greater number of shares.
An illegal share allocation cannot be legalized by the absence of an immediate stock market reaction. Share valuations do not rest on a single factor, like the number of issued shares, and quite often, some factors mitigate the loss of value brought about by other factors.
Definitely a bad Court decision. Hopefully, it will be appealed.
In order to determine the loss of value of a share due to dilution you would have to sell all the company asset and divide the money you get from it into the shares outstanding. Otherwise the value of a share is determine by what the market puts on it based on future growth. And this value is arbitrary. As it can be base 35x earnings one day and 30x the next. One analyst can put a value of $175, while another $200 per share. There is no way to determine a loss of share value due to dilution while the stock is trading in an open market. Now the share price may take a temporary drop if all of a sudden it was revealed that 100 milllion shares were granted as options. But this is not the case. There was nothing illegal about AAPL share allocation. Apple share holders knew about the option grant when they were granted. They also knew the strike price of those options. It's in AAPL financial report. What was hidden from the share holders was the fact that the strike price on certaim options were lower than the price of the stock on the day of issue. But this doesn't matter to the share holders. So long as we knew how many shares and at what price. It does matter to Apple Inc accounting though. Because the in the money portion of the options (the back dated portion) must be declared as an expense when the options were issued. Not when the options were cashed in. So what happened was that Apple Inc had to go back and adjust their books. This decreased the earnings on years that the back dated options were issued. But increase the earnings on years that the options were cashed in as the back dated portion was already expense when issued. And then there's Uncle Sam wanting to line his pocket. So, why aren't the people that shorted AAPL in those years suing Apple because the value of the company was over stated due to Apple Inc. not expensing the back dated options as required? This must have caused an increase of share price based on earnings that didn't reflect the cost of the back dated options. After all, a penny extra per share may be the difference between meeting earning expectation and not meeting earnings or beating expectation by a penny. The shorts would actually have a better case. Specially if they can show, in a certain quarter, that by not expensing the options, AAPL was able to meet or beat earning expectation. Thus causing the stock to rise instead of fall.
In a reasonably efficient market -- as US markets for shares in companies such as Apple are (most of the time!) -- the effect of potential additional dilution should be immediately reflected in the current stock price.
The fact that there was no reaction suggests that the market was not terribly concerned. Perhaps the pluses of keeping SJ (and keeping him happy) outweighed any minuses associated with self-dealing (which, it was, to some extent, IMHO).
Odd how this is getting virtually no press coverage....
No news in good news.