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Apple, Steve Jobs to Settle Stock Options Backdating Charges for $23M
In re Apple Computer Inc. Derivative Litigation
No. 5:06-cv-04128-JF, U.S. District Court for the Northern District of California, 09/08/2008
Companies Mentioned: Apple Computer, Inc.
Holding
The U.S. District Court for the Northern District of California approved the settlement entered into by Apple Computer, Inc. ("Apple") and several of its officers and directors relating to stock options backdating cases. In addition to paying $14 million, defendants likewise agreed to pay $7.3 million in attorney's fees and $300,000 in costs to plaintiffs in the federal actions, as well as $1.2 million in attorney's fees and $50,000 in costs to plaintiffs in the state cases. Defendants also agreed to institute certain governance changes within the company. In addition to Apple, the defendants in this case were: Chief Executive Officer Steve Jobs; former Chief Financial Officer Fred D. Anderson and Chief Financial Officer Peter Oppenheimer; Chief Operating Officer Timothy D. Cook; former General Counsel Nancy Heinen; Senior Vice President Ronald B. Johnson and former Senior Vice Presidents Mitchell Mandich, Jonathan Rubinstein and Avadis Tevanian Jr.; and Board members William V. Campbell, Millard S. Drexler, Arthur D. Levinson and Jerome B. York.
Detailed Summary
A stock option allows the option holder to buy shares at some point in the future for a fixed price. The option price is almost always based on the stock’s price the day the option is granted. Backdating involves manipulating the issue date, often after a run-up in the price of the stock, so the option becomes more valuable for the holder. In some cases, executives have been awarded options backdated to the day the stock hit a low for the quarter.
In this case, plaintiffs in their amended derivative complaint alleged that “ in a striking pattern that could not have been the result of chance, each and every one of the …stock option grants was dated just after a sharp drop and just before a substantial rise in Apple’s stock price….”
The complaint stated that the purported grant dates were not the actual dates on which the stock option grants were made. Rather, defendants improperly backdated the stock option grants to make it appear as though the grants were made on dates when the market price of Apple stock was lower than the market price on the actual grant dates.
This improper backdating, which violated the terms of the company’s shareholder-approved stock option plans, resulted in option grants with lower exercise prices, which improperly increased the value of the options to defendants and improperly reduced the amounts defendants had to pay the company upon exercise of the options.
Plaintiffs further alleged that the grants were made from 1993 to 2001. From 1994 to 2002, defendants, for the purpose and with the effect of concealing the improper option backdating, disseminated to shareholders and filed with the Securities and Exchange Commission ("SEC") annual proxy statements that falsely reported the dates of stock options grants.
Plaintiffs likewise alleged that this misconduct of the officer defendants was not, and could not have been an exercise of good faith business judgment. Rather, it was intended to, and did, unduly benefit themselves at the expense of the company.
As a direct and proximate result of the officer defendants’ breach of fiduciary duty, the company has sustained millions of dollars in damages, including, but not limited to, additional compensation expenses and tax liabilities the company was required to incur, loss of funds paid to the company upon exercise of options, and costs and expenses incurred in connection with the company’s restatement of historical financial results.
In response, Apple said most of the grants cited in the complaint could not give rise to recoverable damages because they were not misdated or the grants were cancelled before they were exercised, thereby providing no benefit for the grant recipient and imposing no loss on the company.
The company stated, in connection with the settlement, that proceeding with the litigation, however, will impose extensive and unrecoverable costs in the form of attorneys’ fees and expenses.
Former General Counsel Heinen settled options backdating charges with the U.S. SEC for $2.2 million last month. That came after former Chief Financial Officer Anderson paid $3.5 million to settle with the SEC last year.
View a PDF of the settlement.Service
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