Apple

The SEC wants to know what Apple knew and when about Steve Jobs' health.

(Credit: James Martin/CNET)

The SEC continues to be very interested in how the health of Apple CEO Steve Jobs went from "hormonal imbalance" to a six-month medical leave in a matter of nine days back in January.

The SEC was said to be reviewing the way Apple handled the disclosures surrounding the health of Jobs in late January, but a new Bloomberg report Wednesday says the federal inquiry is ongoing, citing "people familiar with the matter."

The issue is whether the Apple board knew the seriousness of Jobs' health problems yet made misleading statements to stockholders and the public. On January 5, to explain his absence from MacWorld, Jobs said he was suffering from a "hormone imbalance." Nine days later, Jobs wrote a public letter to say he was taking a medical leave of absence for six months because he had learned in the past week his health issues were "more complex than (he) originally thought."

We know now that Jobs had a liver transplant in April, and has since returned to work on a part-time basis. His doctors have said his health prognosis is good. But during that time, did any board members--two of whom were getting regular updates on Jobs' health status from his doctors--make inaccurate or misleading statements to investors?

There's been disagreement among experts in corporate governance on the proper way to handle the private health issues of the public faces of major companies. Berkshire Hathaway CEO Warren Buffett said in June that as the head of his company, his health is a "material fact" that investors need to know to make informed decisions.

Apple has disagreed, and hasn't even acknowledged that Jobs' liver transplant took place. The hospital in Tennessee where he had the operation was the one who officially confirmed it happened. But nobody is saying exactly why he needed it. In fact, Apple has refused almost all opportunities to discuss Jobs' condition ever since his gaunt appearance at the Worldwide Developers Conference in June 2008 aroused speculation that the pancreatic cancer he battled between 2003 and 2004 had returned.

There is no rule or regulation that says public companies must disclose the health problems of its chief executives. But there is the expectation that if a company does, it should be truthful. The SEC has not accused Apple of lying or misleading the public, but it is trying to determine just how much the company or its board members knew, and when.

Apple CEO Steve Jobs maintained that he was unaware of the accounting implications of stock-option backdating during his deposition last year with the Securities and Exchange Commission, according to a transcript of the interview.

Forbes managed to obtain the document after a Freedom of Information Act ruling in its favor, and has published a story examining the transcript. Apple and Jobs were the subject of an investigation after the company determined that two stock-option awards given to Jobs and other Apple executives were improperly backdated, and that minutes of a meeting were falsified by Nancy Heinen, Apple's general counsel at the time.

No action was ever taken against Jobs or Apple, but Heinen and former Apple CFO Fred Anderson settled cases brought by the SEC concerning their involvement in the options backdating scandal. SEC investigators interviewed Jobs in March 2008 as part of their case against Heinen.

In the deposition, Jobs testified that he requested the 2001 grant later found to be improperly backdated because he was feeling underappreciated by Apple's board of directors. Jobs has only taken $1 in salary a year since his return to Apple and, with the dot-com bust having eroded the value of his stock options, felt he was not being properly compensated for his work at Apple as measured against his peers.

There was a delay between the first proposal of a grant of 7.5 million shares in August 2001 and the final approval of that grant in December, due to haggling between Jobs and the board over the terms of the award. That's when minutes of a fictitious board meeting in October were created by Heinen--according to the SEC--to backdate the option's grant date to a time when Apple's stock price was lower than it was in December. Jobs swore in the deposition that he was unaware of the falsified records.

Jobs also reiterated that he was unaware of the accounting implications of stock-option backdating. It's not illegal to backdate options so long as a company discloses that action and adjusts its books accordingly, but Apple and dozens of Silicon Valley companies over the last eight years did not take that extra step.

In 2007, Anderson claimed that he had informed Jobs of the accounting implications of option backdating, but Apple and Jobs have long maintained that he did not understand the details of such matters.

Former Apple general counsel Nancy Heinen has settled with the SEC over charges that she improperly backdated stock options at the company.

The SEC filed a lawsuit against Heinen last year charging her with cherry-picking grant dates for stock option awards to Apple executives--including CEO Steve Jobs--and falsifying paperwork in order to cover up the selection of the favorable dates. Stock option backdating is legal if properly disclosed, but dozens of companies--including CNET Networks--in the earlier part of this decade failed to do so, and executives at other companies have gone to prison as a result.

Heinen will pay $2.2 million in penalties and fines to settle the case, without having to admit or deny any guilt in the case, according to Reuters. Her attorney issued a statement following the release of the settlement: "I cherish the great people I worked with at Apple, and I am proud of my contributions to its historic turnaround and current success. With this lawsuit behind me, I look forward to addressing the greater challenges of social justice and economic disparity."

Apple conducted an internal investigation into stock option backdating at the company in 2006. While it admitted the practice occurred, the company cleared all current executives of the company, including Jobs, of any wrongdoing. Former CFO Fred Anderson was also sued by the SEC along with Heinen but he settled his case the same day it was filed.

It held out as long as possible, but a Windows Vista laptop fell to a determined bunch of hackers Friday evening at the Pwn to Own contest at CanSecWest.

Since it was the third day of the contest, which saw a MacBook Air get hacked on Thursday, the TippingPoint Zero Day Initiative relaxed the rules even further. On the first day of the contest, only the operating system could be targeted, but on the second day that was expanded to include standard applications. An undisclosed Safari flaw led to the MacBook Air's downfall.

TippingPoint's Aaron Portnoy, with Shane Macauley and Alexander Sotirov (left to right) take control of a Windows Vista laptop.

(Credit: TippingPoint)

But on Friday, hackers could target any "popular" piece of application software that you might find on a system. The Fujitsu laptop, running Vista Ultimate, was compromised by a previously undiscovered flaw in Adobe's Flash software.

Shane Macaulay, Derek Callaway and Alexander Sotirov, were able to gain control of the laptop, which also means they get to keep it. However, since the rules had been relaxed, they only get $5,000; the MacBook Air winners collected $10,000.

The contest rules stipulated that any winner sign a nondisclosure agreement immediately after a successful hack, so that the nature of the flaw could be disclosed to the vendor. Once Adobe and Apple patch their flaws, the nature of the flaw will be disclosed.

A Sony Vaio laptop running Ubuntu remained unscathed at the end of the conference.

A team of security researchers has won $10,000 for hacking a MacBook Air in two minutes using an undisclosed Safari vulnerability.

IDG News Service is camped out at CanSecWest in lovely Vancouver, Canada, and has chronicled the exploits (gotta love security puns) of Charlie Miller, Jake Honoroff, and Mark Daniel of Independent Security Evaluators during the Pwn to Own contest sponsored by TippingPoint. The team was able to gain control of a MacBook Air on the second day of the hacking competition, which pitted the Air against Windows Vista and Ubuntu machines.

Charlie Miller pwns a MacBook Air at CanSecWest.

(Credit: TippingPoint)

No one was able to execute code on any of the systems on Wednesday, the first day of the contest, when hacks were limited to over-the-network techniques on the operating systems themselves. But on the second day, the rules changed to allow attacks delivered by tricking someone to visit a maliciously crafted Web site, or open an e-mail. Hackers were also allowed to target "default installed client-side applications," such as browsers.

The team had attack code already set up on a Web site, and was able to gain access to the MacBook Air and retrieve a file after judges were "tricked" into visiting the site. According to the TippingPoint DVLabs blog, a newly discovered vulnerability in Safari was used to gain control of the Air.

The contest rules stipulated that winners immediately sign a nondisclosure agreement relating to their technique, so that the vulnerability could be disclosed to the vendor, and TippingPoint said Apple has been informed of the vulnerability.

Last year's contest was won by exploiting a QuickTime vulnerability, which was patched by Apple in less than two weeks. As of the time I posted this, no one had gained control of the Vista or Ubuntu machines, but I'll update later as the results come in over the rest of the afternoon.

UPDATED 3/29 11:45am PT - The Vista laptop fell on the last day of the conference. Check out this story for more details.

Apple CEO Steve Jobs will have to appear before federal investigators as part of the Securities and Exchange Commission's lawsuit against Nancy Heinen, Apple's former head lawyer, Bloomberg reported Thursday.

In April, the SEC filed suit against Heinen and Fred Anderson, Apple's former CFO, charging them with orchestrating the backdating of stock options at the company. Anderson agreed to settle his suit with the SEC at the time it was filed, but the proceedings are under way against Heinen. Bloomberg's report said that the SEC is not opening an investigation of Jobs with this move, but that it wants his testimony in connection with the ongoing suit. An Apple representative declined to comment.

Apple admitted last year that stock option backdating--the practice of selecting a favorable date for a stock option award--occurred at the company, and it took an $84 million charge to set the ledger straight. Jobs has never been charged with any wrongdoing in connection with the backdating, which is illegal if it's not properly recorded as an expense.

Apple conducted its own investigation into the matter and cleared Jobs, even though it also said he was aware of the backdating and actually recommended some of the dates. An independent investigator hired by the company said Jobs did not benefit from the backdating (he never exercised the options, although he traded them for a restricted stock award), and that he was unaware of the accounting implications of backdating.

The SEC's case has focused on Heinen's role in creating the minutes of an October 2001 meeting of Apple's board of directors that never actually happened. In the fall of 2001, Jobs and Apple's board haggled over the terms of an option grant to the CEO, specifically over the vesting terms of the agreement. According to the SEC's complaint against Heinen, the board approved a grant of 7.5 million options in late August, but Jobs' objections to the vesting terms of that grant delayed the final approval until December 18.

Apple had missed a November deadline to report the terms of the August grant to the SEC, and it had entered a new fiscal year in October, so in December Heinen recommended an October grant date for this options package and had minutes created of a board meeting dated October 19 to finalize the grant. Of course, that grant wasn't finalized that day, and Apple's full board never met that day; the fake minutes weren't even created until 2002. The SEC has charged that Heinen was the mastermind behind the fake minutes, and falsified other meeting documents to cover the trail.

So what does the SEC want from Jobs? It's important to note that he still hasn't been charged with anything. But he's going to have to testify under oath about the depth of his involvement in the entire stock option mess at Apple. That might finally clear his name of any suspicion, but it could also create serious problems for the company if anything surfaces that's contrary to Apple's public statements about his involvement.

So far, Apple has been able to isolate its iconic CEO against fallout from the backdating mess. Executives at other companies have had to walk the plank even though the SEC didn't take any action against their companies, simply to limit damage to the company. Apple's board has said several times that it's confident Jobs did nothing improper, and given Jobs' importance to Apple it would be almost impossible for board members to ask him to leave and instantly crater the company's stock unless he's shown to have participated in anything untoward.

This could have something to do with Fred Anderson's statements after he settled his suit with the SEC. Anderson has said that he did inform Jobs of the accounting implications of backdating in January 2001, around the time the first of the backdated grants awarded to Apple executives was approved. He said that Jobs had told him the board of directors had approved a grant date for an options package that actually wasn't formally approved until about a month later, and that he warned Jobs Apple would have to record an expense to account for the difference in the company's stock price between the two days.

At the time Anderson released his statement Apple took great care to note that the SEC decided to file suit against just Anderson and Heinen, not Jobs. The SEC cleared Apple as a corporation, and didn't file suit against Jobs or any other member of Apple's executive team in April, but they didn't say they never would, either.

If the report is correct, this isn't over for Apple.