It must be some consolation for Apple Computer that the company’s annual report is going to be published during the slowest news week of the year.
Given the uncomfortable admissions about its past stock options practices � and the cost to the company � that Apple will have to make in the delayed SEC filing due by Friday, less public attention is probably a good thing.
But the lull is unlikely to last long. 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.
“When there are falsified documents, the government views them as an intent to defraud, because people generally don’t falsify documents unless they’re trying to make things different from reality,” said Keith Krakaur, a partner at Skadden, Arps, Slate, Meagher & Flom in New York working on backdating cases.
Krakaur was speaking generally and not about Apple, with which he’s not involved. But he has been in the middle of one of the most contentious options cases yet: He represented Kobi Alexander, the former CEO of Comverse Technology who was indicted by Brooklyn federal prosecutors on charges of backdating option grants. Krakaur is no longer working on that case, and Alexander has been living as a fugitive in Namibia for the past several months.
Read The Recorder‘s roundup of the stock-option backdating scandal. There won’t be a test later … but there might be a subpoena.
Krakaur and other defense lawyers � including several in San Francisco who asked to remain anonymous for fear of affecting local probes � said government lawyers are focusing on falsified records as a means of proving that executives knew their actions were wrong.
“They view that as intent,” he said.
Since the fruits of Apple’s internal investigation were disclosed to San Francisco federal prosecutors in October, the U.S. attorney’s office has shown great interest in the case, said individuals with knowledge of the probe.
And while it’s not yet clear who the prosecutors’ focus is, Apple released a statement in October that “the investigation raised serious concerns regarding the actions of two former officers in connection with the accounting, recording and reporting of stock option grants.”
Apple spokesman Steve Dowling wouldn’t comment beyond what is in the public filings. But individuals with knowledge of the case said those ex-officers are Nancy Heinen and Fred Anderson, the company’s former general counsel and chief financial officer, respectively.
Heinen departed the company last spring � before the options scandal blew up � and sources familiar with her situation said the departure was the result of a tiff with CEO Steve Jobs unrelated to options. Reached last week, Heinen lawyers Cristina Arguedas and Miles Ehrlich wouldn’t discuss their client.
Anderson, who retired as CFO in 2004, was an Apple board member until he resigned in October. His lawyer, Jerome Roth of Munger, Tolles & Olson, declined to comment on his client’s situation.
One outstanding question with possibly huge implications for the company is what kind of liability Jobs � the superstar CEO credited with much of Apple’s success � will face.
In its October SEC filing, Apple said that, “in a few instances,” 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 statement said no current Apple executive was suspected of wrongdoing.
But in recent weeks, Jobs has apparently decided that he needs his own legal representation, separate from Apple’s lawyers at O’Melveny & Myers, and has hired his own attorney to deal with the SEC and Justice Department.
While it will likely take some time � perhaps a matter of months � for the government to decide whether to file criminal charges against Jobs, the 10(k) filing on Friday should provide plaintiff lawyers with some ammunition for their suits against the company.
“We anticipate it’s going to be a very substantial restatement, based on the option grants on record,” said Mark Molumphy, a partner at Cotchett, Pitre, Simon & McCarthy representing shareholders in a securities class action against Apple.
In its October SEC filing, Apple said “stock option grants made on 15 dates between 1997 and 2002 appear to have grant dates that precede the approval of those grants.”
Dowling, the Apple spokesman, said the company is going to adhere to its plan to file the 10(k) by Friday, a date reached in an accord with NASDAQ after Apple announced the options issues would prevent them from filing by the normal Dec. 15 deadline.
But even if Apple misses the filing date, the company may get a reprieve from the normal sanction of delisting, if only because the exchange would be hesitant to prevent normal trading of a company of such great significance to investors.
“Who’s served by the delisting of Apple?” asked Jahan Raissi, a partner at Shartsis Friese who represents companies in SEC matters. “If it was Joe’s Shlock and Poultry Farm, then sure, get them out of there. But not Apple.”