Risk & Compliance

Familiar Tune: Backdating at Apple

Former CFO settles, will pay more than $3.6 million; SEC files charges against former general counsel; no enforcement action against the company it...
Dave Cook and Stephen TaubApril 24, 2007

It’s official: Former Apple chief financial officer Fred D. Anderson has agreed to pay more than $3.6 million to settle charges with the Securities and Exchange Commission stemming from his role in the company’s options backdating scandal.

The SEC also filed charges against former general counsel Nancy R. Heinen, alleging that she participated in the fraudulent backdating of options granted to top officers, which caused the company to underreport expenses by nearly $40 million.

The charges were widely anticipated by a number of news organizations since Monday afternoon.

The commission will not bring any enforcement action against Apple, citing “swift, extensive, and extraordinary cooperation” that included prompt self-reporting, an independent internal investigation, the sharing of the results of that investigation with the government, and the implementation of new controls designed to prevent the recurrence of fraudulent conduct.

The commission alleged that Heinen caused Apple to backdate two large options grants to senior executives — a grant of 4.8 million options to Apple’s executive team and a grant of 7.5 million options to chief executive officer Steve Jobs — and altered company records to conceal the fraud.

The SEC also alleged that Anderson should have noticed Heinen’s efforts to backdate the executive team’s grant but failed to disclose key information to Apple’s auditors and neglected to take steps to ensure that Apple’s financial statements were correct.

“When corporate officers enrich themselves at the expense of a company’s shareholders, the commission will hold the responsible individuals accountable, particularly where, as here, the responsible individuals are among those obligated to ensure that the company complies with all applicable securities laws and that its financial statements are accurate,” asserted Linda Chatman Thomsen, director of the SEC’s Division of Enforcement, in a statement.

“Apple’s shareholders relied on Heinen and Anderson, as respected legal and accounting professionals, to ensure the accurate reporting of the company’s executive compensation,” added Marc J. Fagel, associate regional director of the SEC’s San Francisco office, in a statement. “Instead, they failed in their duties as gatekeepers and caused Apple to conceal millions of dollars in stock option expenses.”

The SEC explained that because the options were in-the-money when granted, Apple was required to report a compensation charge in its financial statements. To avoid reporting this expense, added the commission, Heinen caused Apple to backdate options to a time when Apple’s share price was substantially lower and directed her staff to prepare false documents corroborating the timing of the grants.

The regulator also alleged that both Heinen and Anderson personally received millions of dollars in unreported compensation as a result of the backdating.

Without admitting or denying the allegations, Anderson agreed to a permanent injunction barring him from further violations of the relevant securities laws. He will disgorge about $3.49 million representing the in-the-money portion of the executive team options grant that he exercised and prejudgment interest. He also will pay a civil penalty of $150,000.

The SEC charged Heinen with violating the antifraud provisions of the securities laws, lying to Apple’s auditors, and violating prohibitions on circumventing internal controls. The commission is seeking injunctive relief, disgorgement, monetary penalties, and an officer-and-director bar.

In a statement, Heinen’s attorney Miles Ehrlich asserted, “It is simply unfair to single out Nancy Heinen for enforcement action from among the thousands of executives in hundreds of companies all over this country who’ve been swept up in this stock-option grant-timing issue.”

Added Erhlich: “Nancy did not backdate stock options, and she didn’t deceive anyone inside or outside the company. Every action Nancy took was fully understood and authorized by Apple’s board of directors, was consistent with the interests of the shareholders, and consistent with the rules as she reasonably understood them.”

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