October 4, 2006 2:57 PM PDT

Apple board member resigns in options probe

Apple Computer's investigation into stock option grants has led to the resignation of a former chief financial officer from the company's board of directors.

An investigation by a special committee of Apple's board found irregularities with stock option grants made between 1997 and 2002, the company said in a statement on Wednesday. The investigation started about three months ago.

Following the probe, Fred Anderson, who served as Apple's chief financial officer from 1996 until 2004, has resigned from his seat on Apple's board, the Cupertino, Calif., company said.

Fred Anderson
Fred Anderson

Apple CEO Steve Jobs, in a few instances, was aware that favorable grant dates had been selected, Apple said in its statement. "But he did not receive or otherwise benefit from these grants and was unaware of the accounting implications," the company said.

"I apologize to Apple's shareholders and employees for these problems, which happened on my watch. They are completely out of character for Apple," Jobs said in the statement. "We will now work to resolve the remaining issues as quickly as possible and to put the proper remedial measures in place to ensure that this never happens again."

Jobs likely will keep his job, Merrill Lynch analyst Richard Farmer said in a report Thursday. "Although Steve Jobs may be tainted by the admission that he knew of favorable grant dates, ultimately, we suspect his tenure as CEO is likely to continue, assuming regulators concur with the assertion that he was unaware of accounting implications," Farmer said. "We do not believe the question of personal benefit from options irregularities to be as important as whether Jobs knowingly engaged in personal misconduct, e.g. encouraged accounting to deviate from stated procedures, neither of which appears to have happened."

"Fred believed it was in Apple's best interests that he resign from the board at this time," said Apple spokesman Steve Dowling. "We're providing all details regarding the investigation to the SEC."

The investigation found no misconduct by any member of Apple's current management team, but did raise "serious concerns" regarding the actions of two former executives in connection with the accounting, recording and reporting of stock option grants, Apple said in its statement. Dowling declined to expand on those concerns.

Option grants made on 15 occasions between 1997 and 2002 appear to have grant dates preceding their approval, a practice known as backdating. The most recent evidence of irregularities relates to a January 2002 grant, the company said. Irregularities affect 6 percent of the overall grant dates during that period, Dowling said.

The company and its auditors are reviewing the findings of the investigation. Apple will likely restate its historical financial statements to record noncash charges relating to past stock option grants, the company said. The amount of such charges, the resulting tax and accounting impact, and which periods may require restatement, have not been determined.

In stock-option backdating, a company selects a favorable grant date for the options when the company's stock price was relatively low. Such a move can increase the value of the options when employees later sell them for a higher price.

Backdating is not necessarily illegal, but it can be--particularly if a company doesn't fully disclose the practice to shareholders and regulators.

In one case, former top executives at storage networking company Brocade Communications face civil and federal criminal charges relating to backdating allegations.

In another backdating case, three executives from mobile-phone and telecommunications software company Comverse Technology also face criminal and civil charges. Comverse's former chief executive, Jacob "Kobi" Alexander, was arrested in Namibia, and the United States is seeking his extradition as well as his forfeiture of $138 million in assets, federal officials said Sept. 27.

The Securities and Exchange Commission has said at least 80 companies are the subject of probes relating to the practice. In addition, Apple and other companies--including CNET Networks, publisher of News.com--have announced their own investigations.

Apple disclosed in June that it began an independent investigation of stock option "irregularities." It said Wednesday that the investigators scrutinized 650,000 e-mails and documents and interviewed more than 40 current and past employees.

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6 comments

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The fall guy?
Former CFO falls in his sword and takes the blame for the back-
dated stock options "problem". Sounds reasonable. Let's see if the
feds and the SEC agree.
Posted by lkrupp (1608 comments )
Reply Link Flag
another Gill Amilio.....
apple inc..... the cartoon... brought to you by pixar and disney studios...
Posted by freq (121 comments )
Link Flag
Ironic
No doubt certain investors will be clamoring for more heads to
roll over this.

Which is ironic as without these efforts of these guys at Apple
(including Fred Anderson), Apple would have ceased to be a
viable investment option.

Memories are short about what a dire predicament AAPL was in
before these people turned it around.

Maybe this will be a lesson to shareholders that under-
remunerate a board and executives that have turned in stellar
performance - they'll seek to maximize their income in other
ways.
Posted by dotmike (154 comments )
Reply Link Flag
Myth
The idea that Apple was in dire financial straits is a myth, not
supported by the facts. While they were hardly in the best financial
shape prior to Jobs' return, they certainly were NEVER in any danger
of collapse.
Posted by DeusExMachina (516 comments )
Link Flag
Looking forward to the report on CNet's backdating
We know "Apple" is a buzzword for you, but let's see if you can take your own medicine.
Posted by M C (598 comments )
Reply Link Flag
Nancy Heinen next to feel heat.
Former Apple General Counsel Nancy Heinen is lawyered up.

<a class="jive-link-external" href="http://www.law.com/jsp/article.jsp?id=1147338329872" target="_newWindow">http://www.law.com/jsp/article.jsp?id=1147338329872</a>
Posted by BentonBear (18 comments )
Reply Link Flag
 

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