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

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.

You seem much more interested in jailtime now, than in your earlier defense of their innocence. This, too, may pass.

Fact: no one has gone to jail over this.

“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.

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.

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.

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.