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Apple, Steve Jobs, Executives, Board, Sued For Securities Fraud

The 105-page complaint seeks to recoup billions in lost share value after Apple's admission of executive compensation though the backdating of stock option grants.

Thomas Claburn

July 1, 2008

4 Min Read

Apple, CEO Steve Jobs, former financial officer Fred D. Anderson, former general counsel Nancy R. Heinen, and several members of the company's board of directors were sued Friday for securities fraud in a class-action lawsuit.

The case was filed in U.S. District Court in San Jose, Calif.

Plaintiffs Martin Vogel and Kenneth Mahoney, through their attorneys, charge that Apple, the above-named executives, and board members William V. Campbell, Millard S. Drexler, Arthur D. Levinson, and Jerome B. York participated in a scheme to file false financial statements, thereby concealing millions of dollars in executive compensation though the backdating of stock option grants.

In June 2006, Apple acknowledged that an internal investigation had revealed irregularities in its stock option grants between 1997 and 2001. It also said that one of the grants in question was to Jobs but that "it was subsequently canceled and resulted in no financial gain to the CEO."

According to the complaint, Apple's share price dropped 14% in the two weeks after Apple's admission, erasing more than $7 billion in share value. It's this loss that the plaintiffs hope to recover.

In December 2006, Apple said that as a result of its internal investigation, it would restate its financial results to include "an additional non-cash stock-based compensation expense of $84 million after tax [$105 million pretax], including $4 million and $7 million in fiscal years 2006 and 2005, respectively." The company said it had found no irregular grants after Dec. 31, 2002.

The 105-page complaint asserts that Jobs and the other Apple executives named in the suit knew what was going on. "The defendants knew that options were not granted on the dates that were disclosed to shareholders and falsified the company's records to create the appearance of illegality, and thus bear direct responsibility for their actions," the complaint states. "Here, Jobs and the Individual Defendants clearly appreciated the fraudulent nature of their conduct."

Jobs, according to the complaint, made an "instant paper profit" of $20,325,000 when, on Dec. 18, 2001, he received 7.5 million Apple shares in a stock option grant dated back to Oct. 19, 2001. And Apple's books did not show a $20,325,000 expense.

The complaint also cites a 10 million-share option grant in January 2000 that, through backdating, resulted in "instant paper profit" of $83,762,000 for Jobs, an amount that at the time was not disclosed to shareholders.

Apple did not respond to a request for comment. Owen Pell, a partner at New York law firm White & Case, noted that this new complaint seemed fairly standard for securities litigation and did not appear to offer any new revelations beyond what has been publicly reported about Apple.

Among the challenges plaintiffs face in cases like this, said Pell, is establishing that their loss was directly related to Apple's acknowledgment of stock option issues. "Loss causation is not necessarily obvious on the face of the complaint in terms of the plaintiffs adequately pleading the link between the news of Apple's income restatement and the stock drop," he said. "Apple may be able to point readily to other news, either about the company or the market in general, that coincides with market movements."

Pell said that in cases like this it would not be unusual for a new suit to be placed on hold while pending motions in earlier filed actions were decided, or for Apple to move to dismiss the suit because the plaintiffs have not adequately pled issues like loss causation.

"I think the timing of the drop in the stock and the [Apple] announcements would speak for itself and demonstrate that there is causation," said Gary S. Graifman, a partner in the firm of Kantrowitz, Goldhamer & Graifman, P.C. and one of the plaintiff's attorneys.

In April 2007, the U.S. Securities and Exchange Commission announced that it filed -- and simultaneously settled -- charges against former Apple CFO Anderson, alleging that he should have noticed former Apple general counsel Heinen's alleged participation in Apple's fraudulent backdating of options.

Anderson, "without admitting or denying the allegations in the commission's complaint," agreed to an injunction on further securities law violations, to return $3.49 million arising from Apple options grants, and to pay a $150,000 penalty.

An effort by the New York City Employees Retirement System to hold Apple accountable for its handling of past stock options grants hasn't had much success. In May, U.S. District Court Jeremy Fogel told NYCERS that it could not sue Apple, having already said as much in 2007. The judge said that the pension fund hadn't suffered economic harm. The judge has reportedly advised NYCERS to join a derivative lawsuit against Apple over the issue of stock options that continues to work its way through the legal system.

About the Author(s)

Thomas Claburn

Editor at Large, Enterprise Mobility

Thomas Claburn has been writing about business and technology since 1996, for publications such as New Architect, PC Computing, InformationWeek, Salon, Wired, and Ziff Davis Smart Business. Before that, he worked in film and television, having earned a not particularly useful master's degree in film production. He wrote the original treatment for 3DO's Killing Time, a short story that appeared in On Spec, and the screenplay for an independent film called The Hanged Man, which he would later direct. He's the author of a science fiction novel, Reflecting Fires, and a sadly neglected blog, Lot 49. His iPhone game, Blocfall, is available through the iTunes App Store. His wife is a talented jazz singer; he does not sing, which is for the best.

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