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Apple confirms stock option grant concerns, board member resigns

11:34 - Wednesday 4 October 2006 by THG Reporting Team - source: Tom's Hardware

Cupertino (CA) - Apple today reported the results of a three-month-long investigation into stock option grants to employees. While the company found "no misconduct" of any member of the current management team, Apple confirmed 15 questionable grants in January 2002 and earlier. Former CFO Fred Anderson resigned from the firm’s board following the announcement.

Apple’s investigation "committee" consisting of outside directors, together with independent counsel and accountants confirmed a clean record of the current leadership, but revealed somewhat unexpected results. After searching through 650,000 emails and interviews with "more than 40 current and former employees, directors and advisors," the team identified "stock option grants made on 15 dates between 1997 and 2002 [that] appear to have grant dates that precede the approval of those grants." The most recent "irregularity" dates back to a January 2002 grant.

The announcement differs significantly from Apple’s 29 June note, which mentioned that the firm "has discovered irregularities related to the issuance of certain stock option grants made between 1997 and 2001." So far, the company did not provide details in which way the findings will impact its Q2 earnings report, which has been delayed as a result of the investigation.

Fred Anderson, who served as chief financial officer for Apple between 1996 and 2004 and has been a board member since 2004, has announced his resignation from the Apple board as a result of the findings. Apple said that Anderson informed the company that "he believes it is in Apple’s best interests that he resigns from the board at this time." Steve Jobs was been at the center of at least one backdated grant investigation, but Apple said that "it was subsequently cancelled and resulted in no financial gain to the CEO." However, today’s announcement mentions that he was "aware that favorable grant dates had been selected," while he did not "receive or otherwise benefit from these grants and was unaware of the accounting implications."

Steve Jobs apologized to shareholders and employees and described the events as "completely out of character for Apple." Jobs said that the company will "resolve the remaining issues as quickly as possible and to put the proper remedial measures in place to ensure that this never happens again."

At this time, it is unclear which impact the findings will have on Apple. According to the press release, the investigation "raised serious concerns" regarding the actions of two former, not publicly identified officers "in connection with the accounting, recording and reporting of stock option grants." The company said will provide all details regarding their actions to the SEC. While the backdating of executive stock options is a tool to inflate the value of stock, the practice is not necessarily illegal, as long as the company provides proper documentation, if shareholders are informed, and if reported earnings and taxes reflect the backdating effect. In general, these conditions are believed to be rarely met, which makes backdating practices illegal in most cases.

It is unclear at this time which of those conditions has not been met by the company.