Intellectual Dishonesty? The Steve Jobs Options
24 October 2006Corporate dishonesty continues to appear everywhere: at a time when one might have thought Sarbanes-Oxley, the SEC and various successful governance lawsuits would have led to a slowdown in dishonest practices, we got the options backdating scandals. Today, almost 200 different corporations have announced external and/or internal investigations, generally followed by resignations of top officers.
While this may only qualify as dishonest, one then comes to companies like Apple, which appear to want it both ways: tell the truth, but don’t necessarily tell the whole truth. If this is the case, Apple will end up being a model case of how NOT to handle such affairs, and Intellectual Dishonesty will have cost the company more than dishonesty itself.
Is that a serious charge? Don’t we live in a time when everyone lies, so why not you, too?
I’ve been warning SNS members that Steve Jobs is not out of the legal mess yet, and it increasingly now seems that we have a couple of distinct transactions to look at. For the record, the company issued denials when this story broke around October 5th.
At first, the company claimed that Jobs had not received any tainted options; then, a revision. According to the San Jose Mercury News:
Since disclosing in June that Jobs had received a tainted grant, Apple has maintained that Jobs “did not benefit” from them because he never exercised them. Some experts challenge that claim, however, noting that Jobs traded in the options for $75 million of restricted stock, which is stock that has limitations on when it can be cashed in.
Houston, we have several problems here.
First, we have a company that cannot prosper without Steve; No Steve is No Option for Apple. Second, there have been a series of half-truths, or worse, each suggesting an increasing likelihood that Steve Jobs:
- Did in fact receive tainted options.
- Did in fact exercise some of them, in some way, and receive personal benefit.
- Did in fact know about the backdating practice.
- You know, in this list, there is probably no need for a “d,” although being involved in approval of the transaction would be a definite zinger.
Here is one more bit from SJMN:
A Mercury News report in 2000 drew attention to the timing of Jobs’ first mega-grant. Though Jobs announced at a Macworld conference that he had committed to returning to his job as permanent CEO on Jan. 5, when the stock was at $26, his options were pegged to the price on Jan. 12, which was a monthly low of $21.80.
If the options he received had been pegged to the price Jan. 5, his profit on paper would have been $168 million less.
Now ask yourself: why is the Street writing this off? For the moment, it would seem that we are looking at perhaps the largest-ever options grants in history: 40 MM shares, in January of 2000, followed by 15MM shares in 2001.
How does the Apple co-founder, Steve Wozniak, feel? Here’s a quote from the Guardian (October 23):
‚ÄúI think that there are ways that the stock option programmes basically leave other shareholders treated at a disadvantage, and that‚Äôs illegal,‚Äù he told the Guardian. ‚ÄúI think Apple‚Äôs going to have to correct that for what they’ve done.‚Äù
Here is my conclusion: I think (and I have no direct evidence for this, other than the behaviors and quotes from those involved) that Steve Jobs was aware of the practice, did personally benefit, and had some role in the granting and dating of those options.
I expect that the company is doing its best to find fall guys and scenarios that will allow Steve to stay. Apple, I am afraid, has a real problem, the only problem that it can’t work around. It is trying, but time does not, in fact, heal all wounds. I’ve come to the tentative conclusion that Steve was involved.
I hope that it is not true, as anyone who has been reading SNS for long is aware.
A lot of people have called me the Guy Who Brought Steve Back, since I suggested the success of that move when Gil Amelio was CEO, and an avid reader of SNS. Gil, by the way, should always get the real credit for having saved Apple, by bringing Steve back, when no other CEO would touch him.
I’d hate to also be the guy who showed him the door. He’s doing a miracle job at Apple, and I, for one, would like to see it continue.
Is there a way out of this? I think so. Assuming that what I’ve written is correct, I suspect Steve could find a path, with legal counsel, that would allow return of some monies (it’s going to be paltry for Steve, say $85MM), a clearly written apology together with a description of an inadvertent mistake, and the chance to avoid shareholder suits and, more important, criminal culpability. That last is the sticking point, so get a good lawyer. Better than Sonsini.
Someone has to get this right for the SEC, and for the public. Yesterday would be good.
20 Responses to “Intellectual Dishonesty? The Steve Jobs Options”
November 1st, 2006 at 10:41 am
[...] Mark Anderson: “Apple will end up being a model case of how NOT to handle such affairs, and Intellectual Dishonesty will have cost the company more than dishonesty itself.” [...]
November 1st, 2006 at 12:12 pm
Mark Anderson blogging
As Dave Winer notes, Mark Anderson, writer of the hugely influential Strategic News Service email newsletter is now blogging. I met Mark a couple of years ago while working at PC Pro magazine, and he’s probably one of the smartest
November 1st, 2006 at 1:13 pm
I still don’t really understand what the issue is. Companies could simply give out options with lower strike prices if they wanted. Is the issue that giving out options with a strike price lower than market would look more obviously like it should be expensed?
Further, Jobs’ options were forward dated following what sounded like positive news.
Finally, I find it hard to believe a billionaire ceo would be micro-managing this stuff.
November 1st, 2006 at 7:51 pm
First, I don’t believe that stock options can be issued at any price, at least in general; these options tend to be issued at or above current market prices.
Forward or backward dating are equally illegal.
The whole idea about options is that they are granted on a given date, which carries a price for the stock. False dating, seeking lower pricing, is equivalent to stealing from other shareholders.
November 1st, 2006 at 11:37 pm
My understanding is that ESOs can be granted at any price but granting at the current price is most tax favorable.
Most of what I’ve read indicates that back/front-loading is legal but certain rules need to followed.
I’m not sure how what you describe would be stealing from other shareholders. There’s no impact on dilution and the funds raised don’t go towards income.
November 2nd, 2006 at 11:25 am
I should clearly state that I am not a lawyer, and don’t claim to have any legal expertise in this matter. However, I do think that most of the prior anon’s statements are incorrect.
What is correct, in my understanding, is that the process is what matters: the pricing should be on the date of the grant. The transaction, in that sense, should be transparent from an accounting perspective. The reasoning for price should be on the record.
The reason people are now resigning and going to jail is because, if these processes are not followed properly, they are indeed illegal.
Further, the reason that many companies are now having to restate earnings for years back is that these changes have a direct impact on earnings. Ask Dell, if you don’t believe me, or Apple. Some of these companies even risk being delisted because of the restatement requirements.
Finally, the retroactive effects of restating earnings are that the interim stock price movements become “artificial,” in the sense that buyers and holders of the stock in the interim period were using inaccurate earnings (income) information to make their investment decisions, which is one reason the SEC is investigating all these companies.
November 2nd, 2006 at 12:17 pm
With regard to the concerns expressed by MacJournals News, here
http://friends.macjournals.com/blogstaging/newsItems/departments/inTheNews
their complaint breaks cleanly into two parts.
First, that, because Jobs’ options were “underwater” at the time, there is no issue; and second, that his intent was most likely not to sell them.
Unfortunately, these are easily answered:
1. Although the options were indeed underwater, the point Greif Crystal (and other Wall Street analysts) made was that they were exchanged for other instruments, and so had some inherent value that was captured. Therefore, the underwater bit is irrelevant.
2. What Steve’s sale intent is or was is completely irrelevant to the question of legality. If I broke the speed limit, why I broke it won’t help me much.
November 2nd, 2006 at 12:51 pm
You point out that Apple announced Jobs’ January 2000 option grant one week after it was granted. What you do not say is that, in the intervening seven days, his options had gained more than $40 million in value, or $4 per share.
If these options were backdated, isn’t it significant, whether they ultimately were worth anything or not?
November 2nd, 2006 at 12:54 pm
Woops, I meant to attach that comment to the MacJournal critique of your piece.
November 2nd, 2006 at 2:45 pm
Mark, I don’t know how to make it any clearer:
Fact: stock options can be granted at *any* strike price.
Fact: backdating is legal.
Fact: options backdating has no more bearing on shareholders than does giving him a $40m jet or paying him a $1 salary.
Fact: no one has gone to jail over this.
November 2nd, 2006 at 11:33 pm
[...] Matt Deatherage at MacJournals News (antler tip to Daring Fireball) is the latest to rush to Steve Jobs’ defense in the stock options backdating imbroglio. Responding to a post by Mark Anderson, Deatherage writes: To argue now, three and a half years later, that Jobs benefited because these options were underwater by US$30 per share instead of US$32 per share doesn’t pass the laugh test. [...]
November 4th, 2006 at 12:08 am
I want to say again, for those of you from the MacJournals and Apple world, I am the last person who wants to see SteveJ leave office; as you may know, I did my best to get him back into that office when he returned.
But here we are talking about facts, not as stated by some Anon poster, but just facts, with real names and dates.
Here is a quote from Infoworld.
“The former chief financial officer of software vendor Comverse Technology has pleaded guilty to two felonies in an ongoing U.S. government probe into stock-options backdating.
“David Kreinberg pleaded guilty to one count of conspiracy to commit securities, mail and wire fraud, and one count of securities fraud, the U.S. Department of Justice announced Tuesday. The charges stem from efforts at Comverse, dating back to 1998, to backdate stock options to dates when the stock was trading at historic lows, allowing executives at the company to collect millions of dollars, the DOJ said.
“In charges made public in August, Kreinberg and two other former Comverse executives were also accused of operating a secret stock options slush fund.
“The conspiracy charge against Kreinberg carries a maximum sentence of five years in prison and a fine of up to $250,000. The securities fraud charge carries a maximum sentence of 10 years in prison and a fine of up to $1 million. The charges also require restitution in an amount to be determined by the court at sentencing, currently estimated at $51 million, the DOJ said.”
Whoever Anon is, please stop trying to confuse those who are interested in understanding the real consequences of this problem.
November 6th, 2006 at 2:14 am
Options backdating was not illegal. Companies make all payments out of assets that belong to shareholders. This does not make all company officers criminals – unless they authorize a payment not for the company’s benefit, or outside the company’s operating procedures, when it becomes embezzlement.
Criminality in option granting arises when documents are forged or modified, dates of meetings changed in the record, and so on, amounting to embezzlement for personal gain. Because options grants appeared to have no impact on the company’s accounts, recording of options granting was in the past relatively lax in most companies, creating an opportunity for what appeared to be the perfect crime.
The SEC has retrospectively determined that options granting pre-SOX should have been accounted for in ways which neither companies, nor auditors, nor the SEC seem to have been aware of at the time. Therefore more or less all companies have to go back into the records and determine if any accounting changes must be made because the price granted differed from the market price at the instant of authorization. Not surprisingly such investigations can uncover past criminality where the records are seen as different from the facts.
Those who are convicted of criminality are those who were party to falsification or fabrication of the records of the option granting process.
Because option granting is a process of negotiating with (prospective) employees, it is entirely natural that grants should be somewhat backdated, since they are likely to form part of an offer package which has to be accepted before its execution is authorized.
It is completely to be expected that some grants should have been backdated, that the CEO should be aware of the practice, that the CEO should be unaware of accounting details which no-one else was aware of. It is not to be expected that there was criminality, and regrettably in the case of Apple, it appears there may have been. Two officers left suddenly at the start of the investigation.
The speculation that the current board is concealing misdeeds by Steve Jobs, and sacrificing others in his place seems pretty crazy to me. They would all be in line for jail time and risk having to resign en masse. They would become personally liable to shareholders and risk becoming bankrupt.
I don’t have any problem with SJ losing his job, or going to jail for embezzlement, but frankly, I see abslutely no evidence to support your presumption that it is remotely likely. In reality, if he had behaved improperly, he would have been out (almost) as fast as the two officers who left earlier.
November 6th, 2006 at 4:26 am
A couple more points:
Apple can do just fine without Steve; maybe not as well as with him, but the majority of his effect on the company and its products is in place for the next few years. Apple will have a plan for handling his departure, regardless of options nonsense.
The SEC’s retropsective accounting rule imposition, which may have been motivated by a desire to force the uncovering of criminal activity, has much wider implications, that, it seems to me, might conceivably end up exposing this whole episode as a political witch-hunt.
A low level employee, who received options, is in danger of incurring a retrospective heavy tax liability on account of this ruling, even though the relevant options on which the tax was due have long since lapsed (usually through termination of employment).
I am not familiar with US tax rules, but in most countries, the tax loss that could be claimed when the options later lapsed cannot be offset against prior years gains/earnings.
Not only must the SEC ruling have dragged prior years tax matters for many thousands of employees back into question, but it may quite unfairly have imposed heavy tax burdens on indiviuals who have never realised any gain whatsoever, and who were remote from the options granting process.
Not surprisingly, officers of companies are not going to sign off revised accounts until both the SEC and the IRS have agreed to their proposed restatements.
As regards the Woz quotation, it shows a misunderstanding. Apple the company cannot rectify the situation for shareholders. The officers who have benefitted from misdeeds must repay the unjustified gains.
Finally, whatever the outcome, the maximum total dollar amount involved does not seem likely to be large enough to move the share price significantly, although departure of SJ obviously would in the short term.
November 6th, 2006 at 10:48 am
Anon2 has noted:
“Those who are convicted of criminality are those who were party to falsification or fabrication of the records of the option granting process.”
It shouldn’t have taken this long to get to where we began; this is the crux of the matter described in the opening piece.
In all of the cases involved in SEC investigations, including that of Steve Jobs, the problem arises when a grant is awarded at some time certain, and then re-dated later to give the options out at a time when the stock is at a low.
This happened with Steve.
Anon2’s rather disingenuous comments about how important Steve is to Apple would make Steve laugh, I think. First, the day Steve leaves Apple, the stock goes straight down. Second, plenty of other attempts have proved that there are no likely candidates to run Apple successfully. Finally, the damage to Apple would be huge, and long term.
November 6th, 2006 at 2:30 pm
Sorry, Mark, but I will again state with absolute certainty:
Fact: no one has gone to jail over this.
November 6th, 2006 at 4:28 pm
Anon, it’s an interesting point you make, and one I think I’m willing to concede. But I’m surprised you care so much. If it’s true, it is technically because those who have already been convicted or who have pled guilty have not received their sentences. So you and I can wait a bit and see what their guilt brings them.
You seem much more interested in jailtime now, than in your earlier defense of their innocence. This, too, may pass.
November 6th, 2006 at 5:30 pm
It is true, thank you for the acknowledgement and I hope you would also acknowledge the other three facts.
Kreinberg had a pretty intense program over many years of willful and knowing deceipt which I wouldn’t even put in the same universe as the Apple situation. And Kreinberg’s was a plea bargain which does make one wonder what might have happened with a jury. It’s also interesting that Kreiberg is the only guilty party so far.
November 7th, 2006 at 11:54 am
I stand corrected on fact #3 (per Macalope).
November 29th, 2006 at 9:12 am
Steve Jobs is Going To Jail
By Porter Stansberry
They were all in it together…
The corporate big shots, the bankers, the politicians, and the regulators. They were all feeding on you, me, and everyone who bought a mutual fund or deposited funds in a stock-centric 401k…
Accounting rules require options to be granted at the same price of the stock on the day they’re issued. This is to ensure that no grant recipient is given an “in the money option.”
If you grant options that are already in the money, you’re stealing from other shareholders – it’s that simple. Worst of all, these conspiracies involved the corporations’ boards of directors – the very people who are richly paid to guard the hen house. It’s outrageous.
If the public ever wakes up to what was really happening to its investments in the stock market… well, we’ve only seen the beginning of this scandal. In yesterday’s DailyWealth, I predicted the illegal and immoral backdating of options would send Maxim Integrated (MXIM) CEO John Gifford to jail.
I’ve got one more prediction for you: Steve Jobs is going to jail, too.
Few men have enriched themselves more at the expense of their shareholders in recent years – both at Apple and at Jobs’ other creation, Pixar. At Pixar, the entire board of directors (which included Jobs) voted to approve options grants. And friends of Jobs were showered with illegally backdated options.
John Lasseter, the company’s head of creative development, was granted 2 million options on December 6, 2000. That day saw the lowest closing price for Pixar’s stock for the year, $13.25. The grant is doubly peculiar because it was the largest options grant ever made by Pixar and it was part of Lasseter’s employment contract, which wasn’t signed until March 2001.
By the time Pixar bothered to tell its shareholders about the grant (April 2001) its share price had already risen to $16.33.
Don’t you wish you had a friend like Jobs? Well, maybe not. He loves himself a bit too much, as you’ll see…
At Apple, Jobs granted himself (with his handpicked board’s approval) 10 million stock options in 2000! The grant, which was one of the largest ever given by any corporation, was made on Apple’s single-lowest closing price of the month.
This grant was almost certainly fraudulent (backdated). Jobs, because of his experience at Pixar, certainly knew it was a fraudulent grant. So far, Apple admits Jobs knew about fraudulent grants and was awarded a fraudulent grant, but says he did not “benefit” from the practice.
What? He received a 10 million-share, backdated options grant, but he didn’t benefit? Are they kidding? Jobs is going to jail. There’s no difference between what he admits to doing and embezzling hundreds of millions of dollars from shareholders.
He was taking something that didn’t belong to him from the people who entrusted him to safeguard their interests. It’s absolutely despicable.
Good investing,
Porter Stansberry