Apple is finding itself under pressure as shareholders take legal action following revalations that Apple improperly made grants to three senior executives in August 1997, a day before the company announced a major investment from Microsoft that boosted Apple’s stock.
The legal action says that Apple CEO Steve Jobs personally netted $300 million in profit by selling Apple shares on March 19,
just one day'' after the Wall Street Journal reported widespread backdating on options in corporate America.<BR> The suit also says Apple's options irregularities coincided with suspicious grants at Pixar, the animation studio where Jobs was the biggest shareholder and which Disney acquired last year.</P><P>The suit against Apple, filed Dec. 18 in U.S. District Court in San Jose, consolidated and amended 11 shareholder suits initially filed in July, shortly after the Cupertino company initially revealed irregularities in granting options.</P><P>According to the local newspaper in Silicon Valley the San Jose Mercury the developments emerged shortly after Apple's board of directors on Friday -- in an internal investigation by a committee chaired by Al Gore, the former U.S. vice president -- declared there was no misconduct by Jobs. But Apple revealed that he had personally recommended some favorable grants. The company also disclosed that documents had been falsified to justify the date of one large grant to Jobs on Oct. 19, 2001, portraying a board meeting that never occurred.</P><P>This is no longer a case in which the defense says,
We didn't understand the accounting implications.' It's now a coverup case, and the backdating was more widespread than we initially thought,'' said Mark Molumphy, an attorney with the Burlingame firm Cotchett Pitre Simon & McCarthy, the lead counsel on the Dec. 18 lawsuit.</P><DIV class=NFBreak contentEditable=false style=page-break-before:always> </DIV><P></P><P>Apple spokesman Steve Dowling said Wednesday the company would not comment on matters subject to pending litigation. The company has maintained that Jobs has not personally profited from backdated options.</P><P>The revelations will intensify scrutiny by federal authorities that could result in criminal charges, legal experts say.</P><P>The recent developments -- which follow by three months Apple's acknowledgment that Jobs had been aware of some favorable grant dates -- are raising new questions about the extent of the suspicious practices and Jobs' involvement. In that Oct. 4 public statement, Jobs issued an apology for ``these problems, which happened on my watch. They are completely out of character for Apple.''</P><P>Molumphy described Apple's disclosures on Friday as ``explosive'' and ``cryptic,'' in that it left some questions unanswered, such as exactly who received the grants Jobs had approved.</P><P>``What was he apologizing for?'' Molumphy said of Jobs' earlier statement. ``To any ordinary investor, when you sayit happened on my watch,’ one would conclude they didn’t know about it. But here it not only happened on his watch — he was involved. He was right in the middle of it.”
The Dec. 18 lawsuit claims that on Aug. 5, 1997, while Apple struggled to reclaim its business leadership after Jobs’ return as chief executive, the company granted options to buy more than 2 million shares to three top executives: Robert Calderoni; Fred Anderson, then chief financial officer; and Jonathan Rubinstein, then senior vice president of hardware engineering.
The next day, Jobs announced during a speech at Macworld in Boston that Microsoft, its once-bitter rival, would invest $150 million in Apple and share technology. The value of those options jumped 48 percent, or $7.7 million, in a single day.
The lawsuit claims that the improper use of insider information provided executives with a windfall at the expense of typical shareholders.
The suit points out that Jobs received options to purchase 10 million shares (before subsequent splits) with a grant date of Jan. 12, 2000. The stock price on that date turned out to be a low for the entire quarter and, in the next few trading days, Apple’s stock climbed 30 percent.
Far from resulting in `no financial gain,' Jobs later exchanged his option for 10 million shares of restricted stock in Apple,'' the suit says. The attorneys emphasized that Jobs netted $300 million in profit on stock sales on March 19, 2006,just one day” after the Wall Street Journal first reported evidence of widespread backdating among U.S. corporations.
The lawsuit also emphasizes Jobs’ leadership role as an owner and board member of Pixar. It alleges that from 1997 to 2004, five of seven Pixar grants were recorded at the lowest possible price within the months they were granted, and four of the seven were recorded at the lowest price within the fiscal years.
An analyst calculated the odds of such favorable grants occurring by happenstance as one in 112 million, the lawsuit says.
Much of Jobs’ personal wealth, estimated at $5 billion, has been derived from his 49 percent stake in Pixar. The Emeryville animation studio was acquired by Disney in May, giving Jobs 6.7 percent of Disney stock, making him the media company’s largest individual shareholder and giving him a seat on its board of directors.
The Apple board’s defense of Jobs comes as the national stock options scandal has prompted the departures of CEOs at large companies such as UnitedHealth and home builder KB Home, while leading to criminal charges against former chiefs of Brocade Communications and Comverse Technology.
has stretched its understanding of directors' responsibilities in an effort to clear Steve Jobs,'' said James Post, a professor of business management at Boston University.Directors are responsible for what they knew, or should have known, about the legality of compensation arrangements.”
Apple’s stock dipped 1.23 percent to $83.80 a share on Wednesday, but investors have largely seemed reassured by the board’s account of Jobs’ involvement in options grants. The stock rose 5 percent Friday following Apple’s disclosures about the Gore-led investigation and financial restatements.