SEC files backdating charges against former Apple CFO, general counsel

By Colleen Taylor, Contributing Editor -- Electronic News, 4/25/2007

The U.S. government's ongoing crackdown on stock options backdating hit home this week for two former senior executives of consumer electronics giant Apple Inc. http://www.apple.com

The Securities and Exchange Commission (SEC) on Tuesday filed charges accusing Apple's former general counsel Nancy R. Heinen of participating in the fraudulent backdating of options granted to Apple's top officers that caused the company to underreport its expenses by nearly $40 million. The SEC's complaint alleges that Heinen, of Portola Valley, Calif., caused Apple to backdate two large options grants to senior executives of Apple -- a February 2001 grant of 4.8 million options to Apple's executive team and a December 2001 grant of 7.5 million options to CEO Steve Jobs -- and altered company records to conceal the fraud.

Also on Tuesday, the SEC filed, and simultaneously settled, charges against former Apple CFO Fred D. Anderson, of Atherton, Calif., alleging that Anderson should have noticed Heinen's efforts to backdate the executive team grant, but failed to take steps to ensure that Apple's financial statements were correct. As part of the settlement, Anderson agreed, without admitting or denying the allegations, to pay approximately $3.5 million in disgorgement and penalties, the SEC said.

Anderson stepped down from his post as CFO in October, when Apple disclosed that its own internal probe had indeed discovered evidence of a history of stock options backdating. At that time, Apple said that its investigation had "found no misconduct by any member of Apple's current management team." In December, Apple announced it would incur a whopping $84 million expense as a result of the illegal backdating evidence it found in its internal investigation.

According to the SEC's complaint, filed in the Northern District of California, Apple granted 4.8 million options to six members of its executive team, including Heinen and Anderson, in February 2001. Because the options were in-the-money when granted (meaning that they could be exercised to purchase Apple shares at a below market price), Apple was required to report a compensation charge in its publicly filed financial statements. The SEC alleges that, in order to avoid reporting this expense, Heinen caused Apple to backdate options to January 17, 2001, when Apple's share price was substantially lower.

Heinen is also alleged to have directed her staff to prepare documents falsely indicating that Apple's board had approved the executive team grant on January 17. As a result, Apple failed to record approximately $18.9 million in compensation expenses associated with the option grant. Anderson, who the SEC said should have realized the implications of Heinen's actions, failed to disclose key information to Apple's auditors and neglected to ensure that the company's financial statements were accurate.

Both Heinen and Anderson personally received "millions of dollars" in unreported compensation as a result of the backdating, according to the SEC.

The SEC complaint also alleged improprieties in connection with a December 2001 grant of 7.5 million options to CEO Steve Jobs. Although the options were in-the-money at that time, Heinen again caused Apple to backdate the grant to October 19, 2001, when Apple's share price was lower. As a result, the SEC alleged that Heinen caused Apple to improperly fail to record $20.3 million in compensation expense associated with the in-the-money options grant. The SEC further alleged that Heinen then signed fictitious board minutes stating that the board had approved the grant to Jobs on October 19 at a "Special Meeting of the Board of Directors" — a meeting that the SEC said, in fact, never occurred.

Heinen is charged with, among other things, violating the antifraud provisions of the Securities Act of 1933 and the Securities Exchange Act of 1934, lying to Apple's auditors, and violating prohibitions on circumventing internal controls. The SEC said it is seeking injunctive relief, disgorgement, and undisclosed amounts of money penalties against Heinen, in addition to an order barring her from serving as an officer or director of a public company.

However, Jobs and his Cupertino, Calif.-based company will not incur any major punishments for the backdating. The SEC said Tuesday that it would not bring any enforcement action against Apple based in part on what it called the company's "swift, extensive, and extraordinary cooperation" in the SEC's investigation.