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A Nice Tidy End To The Options Backdating Scandal

Posted by: Peter Burrows on August 14, 2008

Ever since Apple’s board implicated “two former officers” in the options backdating scandal in late 2006, conventional wisdom has been that the company had thrown former general counsel Nancy Heinen and former CFO Fred Anderson under the bus. While the board found plenty of backdating, it exonerated CEO Steve Jobs and pointed the finger at them.

Wasn’t much of a bus, it turns out. Today, Heinen settled year-old charges from the SEC for essentially $200,000—a few quarters’ salary for a top executive at Apple. Sure, she had to repay the $1.5 million from the ill-gotten gains on the backdated options, plus $400,000 in interest, but of course she was going to have to give those back. The $200,000 is the fine for her purported crimes, which included having staffers draw up documents for a board meeting that never happened.

She got a slightly firmer slap on the wrist than Anderson. His fine was $150,000, and he did not get the ban on serving as an officer for a public company that is typical in such settlements. Heinen can’t join a board or be general counsel for another corporation for five years.

So was justice done? As Arik pointed out in the previous post, we'll never really know, since there will be no trial. Also, there's a paragraph in the settlement filing that forbids her from making "any public statement denying, directly or indirectly, any allegation" in the Government's case or that creates "the impression that the [government's original charges are] without factual basis." I don't know whether this is boilerplate language in such documents, but I do know it rules out Heinen issuing the kind of explosive statement that Anderson did on the day he settled with the SEC (he essentially blamed Jobs, without actually saying the words).

What is clear is that everyone directly involved in this scandal is probably having a celebratory drink tonight. Heinen isn't going to jail and she's doubltess got enough Apple stock to pay the government's bill (and since she didn't admit guilt, Apple is probably paying her legal bills; the company declined to comment on this). The SEC can declare victory--and doesn't have to risk defeat in the courtroom. Apple certainly wins, simply because Steve Jobs won't have to answer a lot of very difficult questions up there on the witness stand. Even if innocent--and the lack of charges from the SEC suggests he is--Jobs would have to spin one heckuva reality distortion field to come out of that undamaged. The basic tale of the tape is that Apple's own board found that backdating only began at Apple after Jobs returned to the company in 1997. Says Day Pitney lawyer Stan Twardy, "they may have thrown Heinen under the bus, but I bet Apple worked with her lawyers [to secure a settlement] so Jobs wouldn’t have to testify--because he was going to look pretty bad at the end of the day.” Jobs' other company, Pixar, was also implicated in the backdating scandal, and may still not be out of the woods. The LA office of the SEC didn't return my call, and probably wouldn't comment anyway as to whether its investigation of Pixar, now a part of Disney, is ongoing.

Of course, there's another winner: Apple investors. The prospect of Jobs having to testify would put this backdating scandal back on the front-burner, which couldn't have been good for the stock.

The light punishment wasn't necessarily fair, when seen through other lenses. Robert Mitchell, one of the SEC lawyers on the case, says that “it’s important to remember that this case involved isolated incidents, versus some of the longer-running fraudulent schemes” that have led to stiff penalties, such as that against former Brocade Communications CEO Greg Reyes. He's looking at 21 months in jail, and his former HR chief Stephanie Jensen is looking at four months. While Reyes and Jensen are accused of conspiring to routinely backdate grants without anyone noticing, Heinen's mythical board meeting occurred only once--and she seems to have done it as a result of a miserable Catch-22 caused by a conflict over compensation between Jobs and the board (it's too complex to recount here, but read the complaint and I think you'll see what I mean). On the other hand, Apple's board found 6,428 instances of backdating on 42 separate dates. The SEC charges related to only two of them. But someone okayed all the others.

But fairness is one thing, justice another. At the end of the day I'd say Heinen did get the latter--not because of her guilt or innocence, but because this degree of punishment seems appropriate for the crime. Except for the most egregious examples--where is Kobi Alexander these days, anyway?--I still say backdating is not nearly so horrible a mortal sin as it was made out to be. No, it shouldn't have happened. But it did--all over Silicon Valley and beyond, with the blessing of the outside lawyers and the accountants and the boards. The right thing is that those who participated be punished enough to make them and others never do it again, but in a way that doesn't ruin their lives. With regards to Nancy Heinen, I think that's what has happened.

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Reader Comments

TheAZ

August 15, 2008 08:37 AM

Great blog! Clearly explained that whole Apple back dating issue with a little humor.

Stone

August 15, 2008 08:43 AM

I think you said it right, "fairness is one thing, justice another." If fairness was served then the risk is underestimating the impact. Besides we all know a clear conscience and the bottom line are not compatible. We all serve our own purposes. Corporate brains and consciousness have evolved to help them survive within the scale and orders of magnitude within which they exist.

Eno

August 15, 2008 09:39 AM

You left out two important element. To get any of these settlements to work the Justice Department had to make a poster boy out of Greg Reyes over at Brocade.

The Justice Department knows that they got away with one in the Reyes case and that a more public figure like Jobs couldn't be sold as just another greedy executive to a jury as the main premise. (If you followed that case there was very little if any meat and I think an overturn is likely on appeal.)

Secondly, it was not illegal for Jobs to implement a policy to back date options, the issue is all about the accounting. So it stands to reason that it falls to the finance department.

I hope Nancy remembers to send Reyes (and Jensen) a thank you for paying her freight.

rob

August 15, 2008 09:46 AM

It's not fair to all the others cases the gov't decided to persue and hand out felony convictions for.

She should have to suffer a felony conviction just like all the others.

Just goes to show you, justice in the USA sucks out loud.

OC Resident

August 15, 2008 10:27 AM

I think the reason Heinen and others are getting off is because it has become clear that Sonsini, of Wilson Goodrich Sonsini and Rosati, one of the top law firms in the nation was advising to backdate. At first the government was trying to imply that these rogue executives were doing this and those executives should be thrown in jail for 20 years. Then some cases came and went and the plaintiffs provided proof that WSGR were advising backdating. At that point if the government was going to pursue this, they would need to go after Larry Sonsini, somebody who is always on the short list of candidates for top government posts, etc.

Well, damn, either they lock up Sonsini and Jobs and everybody or they let this die. It looks like the latter. It is ridiculous to prosecute against an industry wide misinterpretation of an unclear accounting rule regarding NON CASH expenses. There has been massive damage done to some of the top companies and entrepreneurs in the country over this. Broadcom is next.

JT

August 15, 2008 11:56 AM

Some of the executives got greedy. Those executives were dishonest and should be replaced. But Apple still makes great products and that is what Apple is famous for. Apple keeps technology innovative.

JT

August 15, 2008 12:38 PM

The greedy and dishonest executives should be replaced. Apple doesn't need dishonest executives. Apple is still a company that creates great products. Apple keeps technology innovative.

paul

August 15, 2008 02:07 PM

Maybe Jobs is sick and they gave him a pass because of a special plea about that?
Just saying..
Either way, this lifts part of the cloud over Jobs future.

OC Resident

August 15, 2008 09:21 PM

The reason they went after Reyes and Broadcom with felony convictions is because these were some of the first cases the DOJ prosecuted and they had *** NO IDEA*** how employee option plans were administered and that this approach to handling dates was a common business practice.

What does that say, the govt lawyers prosecuting accounting violations have never had REAL, CORPORATE JOBS? They've never seen an employee stock option plan ever? They don't know how business is done regarding non cash expenses at all? Fortunately for the DOJ, the juries are a bunch of ignorant dolts who are just convicting every executive or being rich. Otherwise these would all be acquittals.

Steven

August 17, 2008 05:53 AM

I would assume that, if this is indeed the "tidy end," we won't hear any more about this. But, in case you do report on it again, you might want to reiterate that backdating, in and of itself, is not illegal (of course, creating fictional board meetings is). It's not reporting the backdating with respect to its use as executive compensation that gets you in trouble.

This whole scandal can be made to sound pretty ominous, but the premise is really quite simple: how much better would your balance sheet look if you did not have to account for the money you paid your employees? Of course, this is an oversimplification, but basically, that's what happens when you don't report backdating.

To say that "Mr. Jobs was not aware of the accounting implications" is to say that he assumed that the accounting would be properly accomplished as it always is, as I'm sure he doesn't spend a lot of time in that department looking over shoulders. This is probably why the DOJ did not pursue him with any degree of vigor - it was not a fight they would probably win.

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A blog on the daily doings of Apple and the many companies in its orbit, with insight and analysis by two longtime Apple-watchers BusinessWeek Senior Writer Peter Burrows and BusinessWeek.com Senior Technology Writer Arik Hesseldahl.

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