Remember a couple years ago when it seemed like every major technology company—and almost every major U.S. corporation—was fervently auditing its books looking for any financial irregularities that, under new federal legislation, could see their executives facing criminal charges and even jail time for mis-stated financial records? The investigations led to companies like Dell and Take-Two taking major financial hits as the result of having back-dated stock options: that is, making the effective date of a grant of stock options to an employee occur at a particularly advantageous point in the past, effectively increasing the value of the options grant. There’s nothing illegal about back-dating options so long as the practice is fully disclosed—if it’s not disclosed, it can mean bad things for company leaders—as former Take-Two CEO Ryan Brant found out when he plead guilty to falsification of business records to avoid prison time.
Apple was one of the companies that came under scrutiny for backdating options, and the company cooperated with the SEC and conducted an internal investigation that resulted in the company re-stating some $84 million earnings. It also resulted in former Apple CFO Fred Anderson and former general counsel Nancy Heinen being charged by the SEC: Anderson paid $3.5 million in penalties without admitted any wrongdoing—he’s now one of the honches over at Product (RED). Nancy Heinen was still battling the charges.
Now, a new class action lawsuit filed by Martin Vogel and Kenneth Mahoney seeks to recover losses from a decline in Apple’s stock price in the weeks following the admission it was restating earnings due to back-dating. The suit names Apple CEO Steve Jobs, both Anderson and Heinen, and several members of the Apple board, claiming they participated in a scheme to file false financial statements: basically, the suit alleges they knew that was going on, and the effective costs of the back-dated options should have been reflected in Apple’s expenses. Moreover, the suit alleges the admission of accounting irregularities caused Apple’s stock price to drop 14 percent in the two weeks after the admission, reducing the value of Apple shares by more than $7 billion. The class action suit seeks to recover that loss, arguing there was a direct causal relationship between the announcement of earnings restatement and the stock price drop.
Industry watchers disagree on whether the plaintiffs will be able to prove causality: in the complicated world of the stock market, many factors influence a company’s stock price in the short term, and if the case goes to trial Apple will certainly try to make a case the same (or all) of the value decline was due to other factors.
Apple is also facing a separate lawsuit over options backdating.
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