Ex-Apple general counsel settles backdating suit for 2.2 million
Former Apple general counsel Nancy Heinen has accepted a series of sanctions and agreed to pay $2.2 million to settle backdating charges filed against her, the Securities and Exchange Commission said Thursday.
Heinen, who was charged at the federal level by the Commission last year, also agreed to be barred from serving as an officer or director of any public company for five years, and be suspended from appearing or practicing as an attorney before the Commission for three years.
In its April 2007 complaint, the Commission charged the former top Apple legal aid with fraudulently backdating two large options grants to senior company executives and altering records to conceal the fraud. As a result, the complaint alleged that Apple was forced to underreport its expenses by nearly $40 million.
In the first instance, Apple granted 4.8 million options to six members of its Executive Team (including Heinen) in February 2001. Because the options were in-the-money when granted (i.e. could be exercised to purchase Apple shares at a below market price), Apple was required to report a compensation charge in its publicly-filed financial statements.
The Commission alleges that, in order to avoid reporting this expense, Heinen caused Apple to backdate options to January 17, 2001, when Apple's share price was substantially lower. It also charged the former executive with having directed her staff to prepare documents falsely indicating that Apple's Board had approved the Executive Team grant on January 17.
"As a result, Apple failed to record approximately $18.9 million in compensation expenses associated with the option grant," the Commission said.
Separately, the Commission also alleged improprieties in connection with a December 2001 grant of 7.5 million options to chief executive Steve Jobs. Although the options were in-the-money at that time, Heinen ? as with the Executive Team grant ? caused Apple to backdate the grant to October 19, 2001, when Apple's share price was lower, according to court documents.
As a result, the Commission said Heinen's actions caused Apple to improperly fail to record $20.3 million in compensation expense associated with the in-the-money options grant. The Commission further alleges that Heinen then signed fictitious Board minutes stating that Apple's Board had approved the grant to Jobs on October 19 at a "Special Meeting of the Board of Directors" ? a meeting that, in fact, never occurred.
Heinen consented to settlement offered by the SEC without admitting or denying the allegations, however. Of the 2.2 million she agreed to pay, $1,575,000 was a direct disgorgement representing the in-the-money portion of the proceeds she received from exercising backdated options, and $400,219.78 was the interest on that sum to date.
The court order she agreed to also imposed a civil penalty of $200,000.
Apple's former General Counsel, Nancy Heinen, and former Chief Financial Officer, Fred Anderson.
Last April, former Apple chief financial officer Fred Anderson settled a similar case with the SEC by agreeing to a fine of $150,000 and the repayment of about $3.5 million in illegal options gains.
Like Heinen, Anderson agreed to the deal without admitting any wrongdoing. In a statement that followed the settlement, he largely shifted the blame for his involvement in the backdating scandal back to Jobs.
Heinen, who was charged at the federal level by the Commission last year, also agreed to be barred from serving as an officer or director of any public company for five years, and be suspended from appearing or practicing as an attorney before the Commission for three years.
In its April 2007 complaint, the Commission charged the former top Apple legal aid with fraudulently backdating two large options grants to senior company executives and altering records to conceal the fraud. As a result, the complaint alleged that Apple was forced to underreport its expenses by nearly $40 million.
In the first instance, Apple granted 4.8 million options to six members of its Executive Team (including Heinen) in February 2001. Because the options were in-the-money when granted (i.e. could be exercised to purchase Apple shares at a below market price), Apple was required to report a compensation charge in its publicly-filed financial statements.
The Commission alleges that, in order to avoid reporting this expense, Heinen caused Apple to backdate options to January 17, 2001, when Apple's share price was substantially lower. It also charged the former executive with having directed her staff to prepare documents falsely indicating that Apple's Board had approved the Executive Team grant on January 17.
"As a result, Apple failed to record approximately $18.9 million in compensation expenses associated with the option grant," the Commission said.
Separately, the Commission also alleged improprieties in connection with a December 2001 grant of 7.5 million options to chief executive Steve Jobs. Although the options were in-the-money at that time, Heinen ? as with the Executive Team grant ? caused Apple to backdate the grant to October 19, 2001, when Apple's share price was lower, according to court documents.
As a result, the Commission said Heinen's actions caused Apple to improperly fail to record $20.3 million in compensation expense associated with the in-the-money options grant. The Commission further alleges that Heinen then signed fictitious Board minutes stating that Apple's Board had approved the grant to Jobs on October 19 at a "Special Meeting of the Board of Directors" ? a meeting that, in fact, never occurred.
Heinen consented to settlement offered by the SEC without admitting or denying the allegations, however. Of the 2.2 million she agreed to pay, $1,575,000 was a direct disgorgement representing the in-the-money portion of the proceeds she received from exercising backdated options, and $400,219.78 was the interest on that sum to date.
The court order she agreed to also imposed a civil penalty of $200,000.
Apple's former General Counsel, Nancy Heinen, and former Chief Financial Officer, Fred Anderson.
Last April, former Apple chief financial officer Fred Anderson settled a similar case with the SEC by agreeing to a fine of $150,000 and the repayment of about $3.5 million in illegal options gains.
Like Heinen, Anderson agreed to the deal without admitting any wrongdoing. In a statement that followed the settlement, he largely shifted the blame for his involvement in the backdating scandal back to Jobs.
Comments
An utter bargain in the Corporate world.
Yeah -- she pays just over $600K in interest and fines (after disgorging the $ she stole), gets a 5-year vacation, and admits no wrongdoing. Pretty slick.
K
Yeah -- she pays just over $600K in interest and fines (after disgorging the $ she stole), gets a 5-year vacation, and admits no wrongdoing. Pretty slick.
K
She basically pays the difference in money she received extra because of the back-dating plus interest, plus a $200K fine. While I sure wouldn't want to get hit with a $200K fine, the rest of it basically wipes out any financial gain she made from back-dating, which seems a pretty reasonable punishment.
As for "stealing" money... I'm not exactly clear on who the harmed party was. The AAPL shareholders who she helped earn vast amounts of money helping to turn the company around?
Apple is pretty much the NASDAQ mob these days.
She basically pays the difference in money she received extra because of the back-dating plus interest, plus a $200K fine. While I sure wouldn't want to get hit with a $200K fine, the rest of it basically wipes out any financial gain she made from back-dating, which seems a pretty reasonable punishment.
As for "stealing" money... I'm not exactly clear on who the harmed party was. The AAPL shareholders who she helped earn vast amounts of money helping to turn the company around?
You're kidding, right? $200K is chump change for manipulating securities rules. And, she still gets to practice law, just not in front the commission? Priceless!
BTW, just how DOES a corporate general counsel turn a company around? Does she stand in the middle of One Infinity Loop and all the other employees spin the company around her?
Heinen, who was charged at the federal level by the Commission last year, also agreed to be barred from serving as an officer or director of any public company for five years, and be suspended from appearing or practicing as an attorney before the Commission for three years. [...]
Heinen consented to settlement offered by the SEC without admitting or denying the allegations, however. Of the 2.2 million she agreed to pay, $1,575,000 was a direct disgorgement representing the in-the-money portion of the proceeds she received from exercising backdated options, and $400,219.78 was the interest on that sum to date.
The court order she agreed to also imposed a civil penalty of $200,000.
Last April, former Apple chief financial officer Fred Anderson settled a similar case with the SEC by agreeing to a fine of $150,000 and the repayment of about $3.5 million in illegal options gains.
Like Heinen, Anderson agreed to the deal without admitting any wrongdoing. In a statement that followed the settlement, he largely shifted the blame for his involvement in the backdating scandal back to Jobs.
Bright girl! Nancy Heinen's only option was to settle out of Court, disgorge her profits, pay a fine, and agree not to serve as a company officer or director for the next 5 years.
Now, there remains the illegal grant of stock options to Steve Jobs.
When is Steve Jobs going to disgorge the profits he made on his own illegal stock option grant? When is he going to agree to pay a fine and withdraw from Apple and Disney as a company officer or director for a period of 5 years?
Is Nancy Heinen going to sing? When is it that she is going to blame her boss, Steve Jobs, for ordering her to select a profitable date for the illegal stock option grants?
Fred Anderson is already on record to blame Steve Jobs for the illegal stock options. When is Nancy Heinen going to come clean?
And what's worse is that Fred is a stand up guy. I'd love to see the testimony of former Board members and whether Larry Ellison had to testify.
Bright girl! Nancy Heinen's only option was to settle out of Court, disgorge her profits, pay a fine, and agree not to serve as a company officer or director for the next 5 years.
Now, there remains the illegal grant of stock options to Steve Jobs.
When is Steve Jobs going to disgorge the profits he made on his own illegal stock option grant? When is he going to agree to pay a fine and withdraw from Apple and Disney as a company officer or director for a period of 5 years?
Is Nancy Heinen going to sing? When is it that she is going to blame her boss, Steve Jobs, for ordering her to select a profitable date for the illegal stock option grants?
Fred Anderson is already on record to blame Steve Jobs for the illegal stock options. When is Nancy Heinen going to come clean?
I thought the most recent understanding was that Steve Jobs doesn't currently own any backdated shares himself; that he gave up his millions of options upon being warned in 2004(?) in exchange for some less potent fixed shares. And that it would've been worth an additional 6bil in personal wealth if he maintained them and exercised them now.
The problem is that he for some reason let everyone else around him continue to do it and is fully complicit.
When is Steve Jobs going to disgorge the profits he made on his own illegal stock option grant? When is he going to agree to pay a fine and withdraw from Apple and Disney as a company officer or director for a period of 5 years?
Is Nancy Heinen going to sing? When is it that she is going to blame her boss, Steve Jobs, for ordering her to select a profitable date for the illegal stock option grants?
Fred Anderson is already on record to blame Steve Jobs for the illegal stock options. When is Nancy Heinen going to come clean?
Newflash for ouragan: The SEC has already cleared Steve Jobs of any wrongdoing Why would he be fined or penalized in any manner for something where he has no culpability according to the investigators?
And, NO, Ms Heinin is not "going to sing." If she intended to point the blame elsewhere, she would have done so by now. She is a very different person than Fred Anderson, and I suspect that her long-standing relationship with Jobs (going back to the early days of NeXT) makes her much more loyal to Jobs. All of this just further indemnifies Jobs and Apple's board from further penalties. Not to mention that any accusations would still need to be proven.
Newflash for ouragan: The SEC has already cleared Steve Jobs of any wrongdoing Why would he be fined or penalized in any manner for something where he has no culpability according to the investigators?
And, NO, Ms Heinin is not "going to sing." If she intended to point the blame elsewhere, she would have done so by now. She is a very different person than Fred Anderson, and I suspect that her long-standing relationship with Jobs (going back to the early days of NeXT) makes her much more loyal to Jobs. All of this just further indemnifies Jobs and Apple's board from further penalties. Not to mention that any accusations would still need to be proven.
Well stated.
Apple shareholders were the harmed party. Sure, she helped make them money. However, that doesn't mean you can steal from them by concealing information that you find undesirable.
Fact is options were meant to be a bonus incentive for Executives to improve the stock price by placing the executives in the same shoes as shareholders. However, Apple was using options as a form of payment by backdating the stock to dates when the shares were at the lowest. That removes incentive to turn the company around. Moreover, shareholders clearly don't have that luxury. If that incentive is removed, shareholders need to be informed. Nancy, a lawyer, knew that.
She basically pays the difference in money she received extra because of the back-dating plus interest, plus a $200K fine. While I sure wouldn't want to get hit with a $200K fine, the rest of it basically wipes out any financial gain she made from back-dating, which seems a pretty reasonable punishment.
As for "stealing" money... I'm not exactly clear on who the harmed party was. The AAPL shareholders who she helped earn vast amounts of money helping to turn the company around?
Apple shareholders were the harmed party. Sure, she helped make them money. However, that doesn't mean you can steal from them by concealing information that you find undesirable.
Fact is options were meant to be a bonus incentive for Executives to improve the stock price by placing the executives in the same shoes as shareholders. However, Apple was using options as a form of payment by backdating the stock to dates when the shares were at the lowest. That removes incentive to turn the company around. Moreover, shareholders clearly don't have that luxury. If that incentive is removed, shareholders need to be informed. Nancy, a lawyer, knew that.
Failing to "properly record" and "stealing" from the shareholders are not one and the same. Yes, it would be considered "stealing" if you got backdated options and exercized them the next day for the "in the money part". But it's not as though the recipients of these options all of a sudden got millions of dollars in their bank accounts when they got the backdated options. You get the "in the money part" along with the rest of the option, when you exercize them. Most of these execs cashed in their backdated options years after they got them. By this time, the "in the money part" is but a fraction of the value of the options. And most options are granted with a waiting period in which they can't be exercized. Most likely 6 months to a year. And a time limit in which they have to be exercized. Just because it's "in the money" when they got the options doesn't mean that the options will be worth anything 6 months to a year later. So the incentive to increase the stock price is still there.
Steve Jobs $20 Million "in the money part" is nothing compared to the over $4 Billion those options would have been worth if he had kept them.
And it's not as though they weren't part of the company at the date of the backdate. There's nothing wrong with rewarding someone for work he/she did for the company by giving options that is backdated to when he/she began the work. It just has to be recorded properly. If a person headed a project that resulted in the company making a lot of money. Is it wrong to offer that person "in the money" options backdated to the time he started the project? The other option is to just give him a straight out bonus. It's an expense to the company and the shareholders either way. That is if the backdated options are properly recorded.
The real victim is Uncle Sam. Taxes has to be paid by both the recipient and Apple for the "in the money" part of the options at the time of they were granted. Even if the recipient haven't yet exercize those options.
No money was "stolen" from Apple or hidden from the shareholders. The shareholders knew the value of those options at the time they were issued. What the shareholders didn't know was that they were issued at a later date than the option date indicated. Every penny of those options were eventually accounted for when they were exercized. And every shareholder has access to how much each exec earns. Including options and stocks. And how much stocks and option each exec still holds. If the shareholders thought the execs were getting paid too much for the job they were doing, they can try to vote them out at the next proxy. And there's probablly not one shareholder who doesn't think those execs deserved every penny they got from those options. It's not like other backdating cases where the execs were making millions of dollars in options while the share price kept going down. It's the lawyers that created the illusion that shareholders suffered because of this backdating.
Nancy and Fred both paid a hefty fine for what amounts to poor bookkeepping. And it's not the poor bookkeepping that got them into the most trouble. It's the cover up. But attempting to lie about what they did could have landed them in jail. Ala Martha Stewart.
Moreover, in our Country if you commit a crime you get punished regardless of whether anybody got hurt.
No money was "stolen" from Apple or hidden from the shareholders. The shareholders knew the value of those options at the time they were issued. What the shareholders didn't know was that they were issued at a later date than the option date indicated. Every penny of those options were eventually accounted for when they were exercized. And every shareholder has access to how much each exec earns. Including options and stocks. And how much stocks and option each exec still holds. If the shareholders thought the execs were getting paid too much for the job they were doing, they can try to vote them out at the next proxy. And there's probablly not one shareholder who doesn't think those execs deserved every penny they got from those options. It's not like other backdating cases where the execs were making millions of dollars in options while the share price kept going down. It's the lawyers that created the illusion that shareholders suffered because of this backdating.
Nancy and Fred both paid a hefty fine for what amounts to poor bookkeepping. And it's not the poor bookkeepping that got them into the most trouble. It's the cover up. But attempting to lie about what they did could have landed them in jail. Ala Martha Stewart.
I am a shareholder and I don't think one executive deserved what they got. No executive deserves that type of money. That, however, is another issue altogether. As a shareholder, I am strongly opposed to backdating stock options. I, however, didn't know Apple was engaged in that practice because it didn't disclose that information. Moreover, Nancy did more then make a mistake as you imply. Forging board meeting minutes that never took place is a serious issue. That is what the government alleged. Many parties rely on those meeting minutes. Nancy is lucky she isn't losing her law license.
Moreover, in our Country if you commit a crime you get punished regardless of whether anybody got hurt.
In August of 2001 (I think?) Apple board convened and granted Jobs a block of options. At the time AAPL shares was in the mid $17. However, Jobs had an issue with the terms of the option grant. It wasn't until January (after Mac World) of the next year that this issue was ironed out. By this time AAPL stocks had run to to over $21. The board didn't think it was fair or right for Jobs to miss out on the AAPL run up. So they wanted to "backdate" the options to when it they first agreed to grant these options to him. This was a problem because August was the last fiscal year for Apple and the books had already been closed. So Nancy (and Fred?) were instructed to find the next available date to "backdate" Jobs options so that Jobs didn't miss out on the AAPL run up. Since none of the dates in which the board actually convened met this need, Nancy found a date that AAPL stock was the closest to the mid $17 and made up minutes so that it appeared that the board met on that date to grant Jobs the options. So Jobs got "backdated" options that had a strike in the mid $18. Instead of the $21 (and change) at the time both the board and Jobs finally agreed to the terms of the options.
This was a legitimate reason for "backdating" Jobs option grant. However, both Nancy and Fred should have known better. They should have just "backdated" Jobs option package and record it on the books as such. It doesn't matter how much the board and Jobs knew about how the options were eventually recorded. It was Nancy and Fred's job to make sure that it was proper and was legal. If the general consul and CFO told you that this was how we recorded the option grant on Apple's books, you wouldn't think that they went out of their way to do something that was illegal. Maybe some creative bookkeepping, in a gray area or taking advanatage of an accounting loophole. But surely not dead right illegal.
So in the end, it doesn't matter how much the board or Jobs knew about the circumstances behind Jobs option grant. It doesn't matter if the board ordered them to "backdate" the options. It was still Nancy's and Fred's job to make sure it was done legally and according to proper accounting practices (at the time). Those were their jobs.
None of the other board members had to pay back their "backdated" portion of their options. That's because "backdating" is not illegal. So long as the board approves it and it's recorded properly. Both Nancy and Fred had to pay back their portion of the "backdating". Paying back the "backdated" portion of their options was part of their punishment. Along with the fine. All that money went to the SEC. It wasn't restitution to Apple for "stealing" from them. Apple got none of that money. So in the end Nancy had to pay over $2,000,000 and Fred over $3,000,000 for the "mistakes" they made while working for Apple. Just paying a fine would have been getting off "lightly". But they had to also forfeit what all the other board members got to keep.
Their only way out would have been to prove that the board and Jobs ordered them to do something that they (the board and Jobs) knew was highly illegal. Or that the board and Jobs knew that what they were doing was illegal but they approved it anyways. But just informing the board and Jobs of what they did is not enough. It was their job to make sure things are done legally and to make sure the accounting was correct. So the board and Jobs would naturally assume that what was done was "legal". Now this does not absolve the board and Jobs of any of the responsibility of what they did. But it's not criminal of their part.
As for "backdating'. As a shareholder, I have no issue with it. The fact that AAPL can "backdate" options to a not so distance point in the past where the options are in the money and they're still in the money 6 months to over a year later are indications that the stock is going up (or a least doing OK). There are actually companies that if they "backdated" the options, the options would already be underwater when granted.
However, I do have an issue with the size of the options. A few thousand shares here and there sounds more than reasonable. Even if "backdated" for a legitimate reason. But to grant hundreds of thousands or millions of shares at a time seems a little excessive. It's the size of the block of options that makes the "backdating" seems excessive. A three point gain due to "backdating" is only $30,000 on a more than reasonable 10,000 share option grant. But it's $300,000 on what I would consider an excessive 100,000 share option grant. But all and all, the bulk of the money made by Apple execs on options was due to AAPL shares going up. Not because they were "backdated". In this case, I have no issue with what you would consider execs being "over paid".