Apple faces criminal probe in backdating

SAN JOSE - The U.S. Attorney's Office said late Friday it has opened a criminal investigation into the stock options backdating scandal at Apple.

Luke Macauley, a spokesman for the U.S. Attorney's Office in San Francisco, declined to give details of the investigation. But a source familiar with the matter told the Mercury News on Friday that the probe includes an option grant given to Apple chief executive Steve Jobs in 2001 that ranked among the largest in corporate history.

Apple originally reported that its board approved the grant for 7.5 million options at a special meeting in October 2001. But the company disclosed late last month that the meeting never took place and that the terms of the grant weren't finalized until December 2001.

Because Apple's stock appreciated between the falsified October date and the actual date in December, Jobs' options were worth an extra $20million when he received them.

Apple has said that Jobs and the company's current managers were unaware of the falsified meeting and date for the grant.

But it's no surprise that particular grant is drawing scrutiny, said Mercer Bullard, a securities law professor at the University of Mississippi and a former assistant to the chief counsel at the Securities and Exchange Commission.

"When you create fictitious meetings or destroy documents or lie on the stand, you are handicapping the justice system," said Bullard.

"This violates the most fundamental tenant of the securities laws: full and fair disclosure."

In recent days, new details have emerged about the grant, raising further questions about Jobs' role.

Jobs was dissatisfied with the terms of the grant and continued to negotiate the package for months after the board approved it in August 2001, according to a report in Friday's Wall Street Journal.

Wendy Howell, a former Apple attorney who was fired recently as a result of her role in the backdating scandal, was the person at Apple who falsified documents pertaining to it, according to published reports. Howell has pointed the finger at higher-ups at Apple, in particular at her boss, Nancy Heinen, according to those reports.

Heinen, Apple's former general counsel, left the company in May.

Heinen's attorney has denied her client's responsibility in falsifying the documents and is in turn pointing fingers up Apple's chain of command.

Each grant that Heinen was involved in was "authorized and approved by her superiors," Heinen's attorney, Cristina Arguedas, said in a statement.

SEC investigators and federal prosecutors are seeking to interview Howell, Heinen and former Chief Financial Officer Fred Anderson about the grant, the Journal reported Friday. Howell and Heinen have not submitted to questioning, and it's unclear whether Anderson will, the paper reported.

The U.S. Attorney's Office is looking into everything that was disclosed in Apple's internal investigation, but is particularly scrutinizing the 2001 grant to Jobs, a source told the Mercury News.

U.S. Attorney spokesman Macaulay declined to comment Friday, as did John Nester, a spokesman for the Securities and Exchange Commission.

Apple spokesman Steve Dowling declined to confirm media reports that the federal investigations have ratcheted up, whether Jobs negotiated his 2001 option package for months after the board approved it, or the roles of Heinen or Howell in the misdating of options. The company has previously said it has turned over the results of its investigation to federal regulators.

The 2001 grant was one of two jumbo grants Jobs received. In 2000, Apple granted Jobs 10million options in what was one of the largest grants of all time. Analysts have raised questions about that grant as well, because it wasn't finalized until six days after it was initially approved.

Apple has asserted that the original date on the 2000 grant was correct, but the difference is significant. Apple's stock appreciated by $16.75 a share between the two dates, giving Jobs a $167.5 million windfall.

Regardless, Apple has argued that Jobs did not benefit from any backdated options because the company canceled both the 2000 and 2001 grants. However, Apple replaced the grants with 7.5million shares of restricted stock, of which Jobs still holds some 5.4 million shares worth about $511million today.

Apple described the trade at the time as an "exchange."

"'In exchange for': Those three words are pregnant with meaning," said compensation expert Graef Crystal. "For them to make the statement that he surrendered the options and never received a benefit is so duplicitous, so mendacious, that everything they have to say is colored in my mind."

Patrick McGurn, director of Institutional Shareholder Services in Rockville, Md., on Friday called for Jobs to disgorge $20 million - the amount of the accounting charge Apple took for the 2001 grant.

"It really is cruel and unusual punishment for English language to try to come up with language that would indicate that he did not benefit from the award he received," said McGurn. "Clearly, those awards were ultimately exchanges on a roughly value-for-value basis."

Jobs' grants are among some 6,400 that were backdated between 1997 and 2002, Apple acknowledged in regulatory filings late last month.

Apple's board last month cleared Jobs and other current managers of wrongdoing in its overall backdating scandal, saying it had "complete confidence" in them. However, the company did say that it has "serious concerns" about the actions of two former officials. Although the company has not named those two officials, sources close to the matter say they are Anderson and Heinen.