A Nice Tidy End To The Options Backdating Scandal

Posted by: Peter Burrows on August 14

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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