Apple's own options probe finds no misconduct

updated 7:07 p.m. ET Jan. 10, 2007

SAN JOSE, California - Apple Computer Inc. cleared Chief Executive Steve Jobs and the rest of its current management of misconduct involving stock option grants, despite Jobs’ awareness of favorable grant dates.

The company said Friday it has “complete confidence” in the executive team, though it also acknowledged the backdating of thousands of option grants and restated past earnings due to the results of its probe of options practices.

In a filing with the Securities and Exchange Commission detailing its probe, Apple said Jobs was aware of, or recommended the selection of, some favorable grant dates but he neither benefited financially from them nor “appreciated the accounting implications.”

The options mishandling will result in an additional noncash charge of $84 million, the Cupertino, Calif.-based company said. In its full-year financial report filed with the SEC, which was delayed due to the options probe, Apple said earnings for fiscal years 2006, 2005 and 2004 will be lowered by $4 million, $7 million, and $10 million respectively.

Apple shares rose about 5 percent to $84.91 in morning trading on the Nasdaq Stock Market after the news.

The three-month probe identified a number of instances in which option grant dates were intentionally selected in order to obtain favorable exercise prices, the company said.

“The special committee, its independent counsel and forensic accountants have performed an exhaustive investigation of Apple’s stock option granting practices,” former Vice President Al Gore, chair of the special committee, and Jerome York, chair of Apple’s Audit and Finance Committee, said in a joint statement. Both Gore and York are Apple board members. “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.”

The maker of the iPod music player and Macintosh computers is one of the most prominent among some 200 companies that have come under scrutiny for backdating stock options. It’s a widespread practice, especially in Silicon Valley, that involves pegging stock options to favorable grant dates in the past to boost the recipients’ award.

The manipulation itself isn’t necessarily illegal, but securities laws require companies to properly disclose the practice in its accounting and settle any charges that may result.

Dozens of companies have been forced to restate their earnings, erasing some of their earlier recorded profits, after their stock option shenanigans came to light.

Apple initiated its own stock options probe in June and delayed its quarterly report for the period ending July 1 and its annual report for the fiscal year ended Sept. 30 as a result.

Apple said its investigation reviewed 42,077 stock option grants made on 259 dates between October 1996 and January 2003. Of those, 6,428 grants on 42 dates did not have the proper measurement dates, Apple said.

Of two option grants awarded to Jobs, one was improperly dated Oct. 19, 2001, with an exercise price of $18.03, instead of the correct date on Dec. 18, when Apple shares were trading at $21.01. That stock-option grant was for 7.5 million shares. Jobs later surrendered those options without exercising them and realized no financial benefit.

The special board meeting that was pegged to the Oct. 19 grant never occurred, the company said. “There was no evidence, however, that any current member of management was aware of this irregularity,” Apple stated.

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