More Companies May Dodge Bullet in Options-Backdating Probe

If the high-profile Apple options-backdating case is any guide, other U.S. companies under scrutiny could be let off the hook by regulators who appear to be focusing on individual rather than corporate conduct.

Shareholders already have taken a hit from backdating activities through companies' financial restatements or stock declines. Many legal experts expect regulators to give stockholders a break by not seeking hefty fines and lengthy litigation from companies that cooperate with the probes.

The U.S. Securities and Exchange Commission brought civil charges this week against two ex-Apple executives accused of stock options backdating, but the company itself was not charged.

Nor was CEO Steven Jobs, though legal experts say it is possible the SEC could ultimately bring more charges against individuals in the case. Federal prosecutors also could bring their own separate criminal charges against the company, though experts say that scenario is less likely now that regulators have said they would not pursue a case against Apple.

"Extraordinary Cooperation"

The SEC cited Apple's "swift, extensive, and extraordinary cooperation" in its probe into stock options awards. The company helped the agency through its self-reporting measures, by sharing the results of an independent internal investigation with the government as well as by implementing new internal controls, the SEC said.

"The SEC's statement about Apple's cooperation is meant to send a message to other companies that full cooperation will be rewarded," said Robert Heim, a former SEC prosecutor now in private practice at law firm Meyers & Heim in New York.

Regulators are "looking for companies to police themselves, and the SEC figures that the company is in the best position to review voluminous documents and make sense of what happened," he said.

In the Apple case, the SEC accused former Chief Financial Officer Fred Anderson and ex-General Counsel Nancy Heinen of improperly backdating options, but reached a $3.5 million settlement with Anderson, who did not admit or deny wrongdoing.

The SEC has been scrutinizing about 130 companies suspected of altering option grant dates to boost potential profit for the recipients. The commission's chairman, Christopher Cox, said this week that the agency is working on ways "to move many of the cases very quickly" though he did not say how the cases were likely to be resolved.

Other Executives Charged

The SEC recently has brought civil backdating cases against other former U.S. corporate executives, including against the ex-general counsel of Monster Worldwide and against former executives at Engineered Support Systems.

An SEC spokesman, John Nester, said while companies had not been the focus of backdating-related cases brought by the commission so far, the SEC was not trying to send a message about what it will do in the future.

"Each of our actions is determined by the unique facts and circumstances of the case," he said.

Still, the Apple case shows that the SEC is mainly targeting individual corporate officers -- not the businesses themselves -- because the commission wants to be sure not to do anything that hurts shareholders, legal experts said.

"I don't think it will be a situation about companies," said Paul Bessette, a partner at law firm Akin Gump in Austin, Texas who heads its securities litigation practice. "It will be a situation about individuals who acted with some intent in backdating."

It doesn't make much sense in backdating cases, which are seen as hurting stockholders because top executives received more compensation than they were supposed to, to punish the corporation itself, said Jill Fisch, a securities law professor at Fordham University Law School in New York.

Assessing fines on the company that would come out of the corporate coffers would effectively punish shareholders twice, she said.

Penalizing Stockholders

"The idea is, when you penalize the company, you penalize the current stockholders," she said.

Fisch said the matter is part of a larger issue of whether it makes sense for the SEC, as well as criminal prosecutors, to target corporate entities at all.

Some critics of these prosecutions say they punish all of the company's employees, not individual wrongdoers. The most prominent corporate criminal prosecution was the 2002 obstruction-of-justice conviction of now-defunct accounting firm Arthur Andersen. The conviction later was overturned.

"When a company is indicted it is crippling," said Peter Verniero, a former New Jersey state attorney general who now handles internal investigations at law firm Sills Cummis Epstein & Gross in Newark.

When the SEC brings a civil case, "it's not as severe as an indictment, but in the marketplace in terms of reputational damage it can be severe."