Myth 3: Apple Options Scandal and Delisting Panic

Top 10 Apple Myths of 2006

Myth 3: Apple Options Scandal and Delisting Panic

This myth was based on reports Apple itself issued in this summer, stating that irregularities were found in stock options granted to certain Apple employees between 1997 and 2001. The internal audit presented the problem as an issue Apple was investigating.

Backdating stock options is potentially a criminal matter, since it manipulates the value of stock; improperly awarded options water down the overall value of stockholders' shares. Backdating options can reward employees with the potential for stock ownership that comes at the expense of the wealth of company investors.

If backdating is not reported to shareholders, they can sue the company in civil court for damages, and government regulators can charge responsible parties in criminal court for breaking securities law.

The Fallout

News sources jumped on the story to suggest that a huge scandal was in progress, drawing parallels between Apple's own investigation into its options, and the criminal actions of Enron and WorldCom, which were investigated by the SEC.

The difference of course, is that the SEC didn't prompt an investigation of criminal misconduct at Apple. The company announced the problem and immediately took steps to determine the extent of the problem and how it would be resolved.

News reports played upon general misunderstandings of the complexities of securities regulations, and called into question whether Apple would be delisted from the NASDAQ stock exchange due to a delay in filing its amended reports.

The role of Steve Jobs was also repeatedly brought up, despite early and frequent reports that the company had found no wrongdoing on the part of its CEO.

The latest surge of foaming panic invented the phrase "forged documents" as a new and more sensationalist way to refer to backdating option grants.

Carolyn Said, writing for the San Francisco Chronicle, described the historically commonplace practice backdating options throughout the 90s, drawing a distinction between the reaction of backdating at Microsoft and Apple:

“From 1992 through 1999, Microsoft Corp. awarded employees options that were retroactively keyed to its stock's monthly lows. Annual awards were given in July, at that month's low point. Awards to new employees were given at the lowest closing price during the month after they were hired.

“Microsoft disclosed and ended the practice in 1999, taking a $217 million charge. The revelation raised nary an eyebrow.

“‘When Microsoft said it had to restate its earnings for backdating, the reaction of the market was ho-hum,’ [Fred Koenen, a securities law attorney at the Schinner Law Group in San Francisco] said.”

The Myth, Unwoven

Apple's investigation resulted in an earnings restatement that included $84 million in options related expenses.

The special investigating committee, chaired by former Vice President and Apple board member Al Gore and Jerome York, chairman of Apple's audit and finance committee, stated, "The board of directors is confident that the company has corrected the problems that led to the restatement, and it has complete confidence in Steve Jobs and the senior management team."

No stock market delisting, no public crucifixions.

Hiding the Damages

After the announcement, it became difficult to maintain a high panic crisis about the issue, so bloggers began referring to the event a simply one "imbroglio" among many others.

Michelle Meyers, writing for the infamous CNET, said Apple faces "several federal lawsuits," repeating a phrase coined for the AP by Betsy Schiffman. Both writers failed to point out that the suits were merely complaints filed with the SEC by competitors, not actually criminal cases filed by federal government investigators.

The "several" lawsuits identified were simply taken from Apple's SEC filings:

•Attorneys representing stockholders suing Apple over delayed SEC reports
•Virgin suing Apple over iTunes.
•PhatRat Technology LLC suing Apple over patents involving Nike+ products
•Attorneys representing customers suing Apple over iBook logic board failures

In other words, the same handful of frivolous "federal" lawsuits every company drags along in the normal order of business.

These lawsuits have been in place for months and will constantly be replaced by the same ambulance chaser attorneys who sponsor frivolous class action and patent abuse cases that enrich lawyers and do nothing for consumers but offer them a coupon.

Myth 4: The iTunes Monopoly Myth

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