Apple's Options Woes Deepen

News reports of falsified documents sent investors scurrying. The stock price has recovered, but Apple's legal troubles are far from over

by Arik Hesseldahl

For Apple (AAPL), it was beginning to look a lot like, well, Christmas. Analysts pointed to brisk sales of iPods and iTunes during the holidays, the most recent earnings report indicated robust demand for Macs, and the blogosphere was abuzz with rumors of hot new gadgets to be unveiled by Apple Chief Executive Steve Jobs in January.

But then came reminders that the company remains mired in an options mess. Early in the normally quiet week before the New Year, a California legal trade publication reported that Apple may have falsified documents relating to stock-option grants made to executives between 1996 and 2002, and that CEO Steve Jobs has retained his own lawyer in relation to the probe.

Jobs Retains Counsel

The Recorder, a legal journal based in San Francisco, said federal investigators are focusing on a set of documents concerning Apple's handling of stock-option grants. An Apple spokesman declined to comment on the report, but a source familiar with the matter confirmed to BusinessWeek.com that Jobs has retained an outside attorney. The person didn't identify the counsel.

The report—and a later article in the Financial Times—served as reminders that Apple has yet to move beyond concerns over its handling of stock-option grants to executives. It also raises questions about the extent to which Steve Jobs' reputation may be harmed by the matter.

Apple has already owned up to "irregularities" and said an internal investigation found several instances where Apple options grants appeared to have grant dates that predated approval. It also has said Jobs was aware of the practice but that he didn't benefit personally from it—and that the company hadn't found misconduct by its current management team (see BusinessWeek.com, 6/29/06, "Apple's 'Irregular' Options," and 10/5/06, "Apple Comes Clean on Options").

Apple is among dozens of companies, many of them in the tech industry, now being called on the carpet for how they doled out options. More disclosures are likely to emerge by Dec. 29, when Apple is due to file its quarterly and fiscal yearend reports with the Securities & Exchange Commission.

Investigation Targets

Meanwhile, according to the Recorder, federal officials are weighing the revelation of falsified documents as they consider pursuing a criminal investigation against the company or current and former executives. The report said that investigators appear to be focusing primarily on the actions of two executives, former General Counsel Nancy Heinen, and former Chief Financial Officer and Director Fred Anderson. A Financial Times report, published early on Dec. 28, cited unidentified sources as saying Jobs was handed 7.5 million options in 2001 without the required authorization of the company's board.

The approval date of this block of options coincides with a crucial point in Apple's corporate history: The grant came only a day after the company had reported quarterly earnings, at a time when the stock was trading near its lowest point during the calendar year, and only a few days before Oct. 23, the day that Apple introduced the iPod music player. Even so, by 2003 these options were worthless and Jobs voluntarily canceled 27.5 million options because they were underwater. In exchange he received restricted stock.

Anderson had been CFO since March, 1996, and retired on June 1, 2004. A week later he was named a director of the company but resigned his board seat on Oct. 4 in the aftermath of Apple's investigation. Since leaving Apple's board, Anderson also has retained a lawyer, Jerome Roth, of Munger, Tolles & Olson in San Francisco. Roth didn't return a call seeking comment.

Heinen had joined Apple following its 1996 acquisition of Next, the deal that also brought Jobs back to Apple after an absence of more than a decade.