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Something Rotten at Apple?

Thursday, 28 Dec 2006 | 10:39 AM ET
Spinach Pesto over Linguine
Photo by: Kenneth Polcari
Spinach Pesto over Linguine

Just a day before Apple files its delayed annual report, some blockbuster news is being digested, courtesy of the Financial Times: Steve Jobs receives 7.5 million options without board approval. And even worse, documents were forged, the article says -- courtesy of sources close to the investigation -- by Apple execs to cover up the misappropriated options.

If the news is true, it's stunning. It taints Steve Jobs, possibly beyond repair. And it would taint a company so totally driven my "image" and good PR. That is, if the the news is true.

If.

The Apple story in the FT should be taken with caution, not because the story is suspect, or its reporter Richard Waters is untrustworthy. I've read both for years and have no reason not to believe either.

But a little perspective here may be helpful in flushing out the story:

The options grant referred to in the story has already been widely reported. So has Apple's own preliminary findings from its own internal investigation, dated Oct. 4 (I've pasted the actual release below.)

There has been widespread speculation of improper records, even falsified documents. Speculation from analysts on the Street, insiders at the company, experts who've watched Steve Jobs for years, investors with a close connection to the company.

In fact, in its own inimitable way, Apple addressed that notion, albeit vaguely, when it referred to the actions of two former execs and "serious concerns" about their activities, when the company disclosed preliminary findings from its own internal investigation. Remember that former CFO Fred Anderson resigned from the board Oct. 4 because of all this.

Jobs will be tainted. No question. No matter how this all turns out. But there is reasonable doubt, at least so far, that these grants -- later rescinded anyway -- may have occurred without his knowledge. Before firing up the torches, and sharpening the pitchforks, read Apple's own release.

Bottomline: It's very possible that Apple as a company may have done something wrong, but that Jobs didn't know. And when he did become aware -- or when someone did -- those options grants were taken away. Apple refuses to draw the connection between grants rescinded and "wrongdoing," though the circumstantial evidence clearly points to something resembling that.

Who forged what and when? And did Jobs know? The key questions that don't have answers yet.

I don't want to be in the position of having to defend Steve Jobs, but perspective here can go a long way toward the accuracy of the story. He may be guilty as sin! But the facts dribbling out from Apple offer a compelling alternative. At least so far.

No matter whether Jobs knew or didn't, whether grants were given or rescinded, whether Apple has taken its own internal actions or not, if documents were forged, and laws broken, and investors hurt, the company needs to pay the price, and the buck stops with Jobs. Period.

Apple's statement, from Oct. 4, may offer some helpful background, even foggy insight into what really happened. Hopefully, Apple will fill in even more blanks when the company files its delayed annual report by close of business (Pacific time) on Friday. If not, the Bears may start eating their way even closer to Apple's core.

FROM APPLE

Apple’s Special Committee Reports Findings of Stock Option Investigation

Fred Anderson Resigns from Apple Board of Directors

CUPERTINO, California — October 4, 2006 — Apple® today announced that the special committee of its board of directors has reported its findings after a three month investigation into Apple’s stock option practices. The special committee of outside directors, together with independent counsel and accountants, examined more than 650,000 emails and documents, and conducted interviews with more than 40 current and former employees, directors and advisors. Apple initiated this voluntary independent investigation after a management review discovered irregularities in past stock option grants.

The independent investigation's key findings are:

• The investigation found no misconduct by any member of Apple's current management team.

• The most recent evidence of irregularities relates to a January 2002 grant.

• Stock option grants made on 15 dates between 1997 and 2002 appear to have grant dates that precede the approval of those grants.

• In a few instances, Apple CEO Steve Jobs was aware that favorable grant dates had been selected, but he did not receive or otherwise benefit from these grants and was unaware of the accounting implications.

• The investigation raised serious concerns regarding the actions of two former officers in connection with the accounting, recording and reporting of stock option grants. The company will provide all details regarding their actions to the SEC.

"I apologize to Apple's shareholders and employees for these problems, which happened on my watch. They are completely out of character for Apple," said Steve Jobs, Apple's CEO. "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."

The company also announced that Fred Anderson, Apple’s former CFO, has resigned from its board of directors. Mr. Anderson, who served as CFO from 1996 until 2004, informed the company that he believes it is in Apple’s best interests that he resign from the board at this time.

The company and its independent auditors are reviewing the findings of the independent investigation. Management continues to believe, and the audit committee agrees, that Apple will likely need to restate its historical financial statements to record non-cash charges for compensation expense relating to past stock option grants. The company and its independent auditors are reviewing recent accounting guidance published by the SEC, and have not yet determined the amount of such charges, the resulting tax and accounting impact, or which periods may require restatement. The company continues to proactively inform the SEC of its findings.

Jobs on the Hot Seat
A look at whether Steve Jobs will lose his job after the company reportedly gave the CEO stock options in 2001 without authorization of its board; with Roger Kay, Endpoint Technologies President & Founder and CNBC's Carl Quintanilla

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