The stock options backdating issue may be catching up to Apple CEO Steve Jobs.
While most are focused on Apple's retail sales, latest gadgets and Macworld, the company's stock option backdating probe--you know the one that has caused Apple to delay its annual report--remains a big issue.
According to The Recorder, a publication of Law.com, federal prosecutors are looking closely at stock option administration documents that were apparently falsified.
Justin Scheck reports:
According to people with knowledge of Apple's situation, federal prosecutors are looking closely at stock option administration documents that were apparently falsified by company officials to maximize the profitability of option grants to executives.
The faked documents were revealed in a three-month internal probe -- conducted by Quinn Emanuel Urquhart Oliver & Hedges -- that concluded in October, said individuals familiar with the case who requested anonymity because it remains the subject of criminal and civil government investigations.
The falsification of documents is perhaps the key issue for government officials trying to determine which of their 100-plus backdating investigations will be pursued as criminal matters and which will be limited to civil SEC inquiries.
Throughout this saga, Apple CEO Steve Jobs skated past any concerns even though a company statement acknowledges that he had some knowledge of favorable option grant dates. The response from Apple investors and customers thus far has been "so what he's Steve Jobs." The Recorder, however, reports that Jobs has hired his own legal representation.
What happens from here is anyone's guess, but it does appear that the conventional wisdom bandwagon for Apple has tipped over. Aside from initial worries about Jobs' standing, it's widely assumed he's going to stay at the helm of Apple. And why not? Jobs is a tier one CEO. There are two tiers of CEOs--the top tier occupied by HP's Mark Hurd and Apple Steve Jobs--and everyone else. That top tier enjoys the benefit of the doubt despite any scandal. The lower tier means the CEO gets tossed. Which tier you wind up on has a lot to do with how well you hit your earnings targets.
Now maybe it's not a big deal that Jobs hired his own legal representation. But The Recorder report is a bit of a shocker considering Apple's restated annual report is due any day now and Wall Street sounded the all clear a few days ago.
On Dec. 15, J.P. Morgan analyst Bill Shope wrote:
"In its filing with the SEC this morning, Apple stated that it intends to file its 10-K for the fiscal year ended September 30, 2006, by December 29, 2006, along with its 10-Q for the quarter ended July 1, 2006. This suggests the options investigation is finally reaching its conclusion and that investors will once again be able to focus on the fundamentals of the Apple story. Shope also indicated that worries about Jobs' job had subsided."
On Oct. 18, Piper Jaffray analyst Gene Munster wrote:
"We believe the options backdating issue is in Apple's rearview mirror and Steve Jobs will remain Apple's CEO. Although these issues tarnish Apple's squeaky clean image, they do not impact the company's underlying fundamentals."
And on Oct. 5, Merrill Lynch analyst Richard Farmer said:
"Although Steve Jobs may be tainted by the admission that he knew of favorable grant dates, ultimately we suspect his tenure as CEO is likely to continue, assuming regulators concur with the assertion that he was unaware of accounting implications, and other matters. We do not believe the question of personal benefit from options irregularities to be as important as whether Jobs knowingly engaged in personal misconduct (e.g. encouraged accounting to deviate from stated procedures), neither of which appears to have happened, according to Apple’s investigation."
Bottom line: The Register's report dings months worth of conventional wisdom about Apple. With the latest news on the options issue it's possible some of those conclusions will be rethought slightly. At the margin, there is more uncertainty about Jobs' standing than there was yesterday.
It's unclear what Apple would look like without Steve Jobs. Numerous research reports from October speculated that Apple would continue to do well. That's probably on target to a degree--it's not like the company is going to revert to the Gil Amelio days--but it may be time to begin pondering Jobs successor just in case. He's a tough act to follow.