Corporate Governance

Former Apple General Counsel Settles for $2.2 Million After SEC Backdating Allegations

By Scott James

This post is about former Apple General Counsel, Nancy R. Heinen’s $2.2 million settlement stemming from the SEC's complaint alleging fraudulent stock option backdating. Former CFO, Fred D. Anderson was also allegedly involved. Heinen and Anderson received some of the backdated options, along with other high level Apple executives including Steve Jobs. We recently discussed stock backdating in The SEC, Outside Directors, and the Preemption of Delaware Law: Mercury Interactive.

On April 24, 2007, the SEC filed a complaint in the District Court for the Northern District of California San Jose Division alleging that Apple General Counsel, Nancy Heinen and CFO, Fred D. Anderson engaged in improper stock option backdating by using false grant dates that concealed $40 million in compensation expenses.

Specifically, the SEC claimed that Heinen fabricated financial statements and board minutes so that the options in question would appear as if they were “at the money,” when the options were really “in the money.” Stock options are “at the money” when the strike price is the same as the trading price and are “in the money” when the strike price is lower than the trading price. Normally, if options are “at the money,” the company does not have to account for the options as compensation; but if options are “in the money,” the company must expense the difference between the strike price and the trading price as compensation in its financial statement. The company will recognize no compensation expense when it grants options “at the money.”

The first instance of alleged fraud occurred in February 2001 when Apple stock traded at around $21 per share. Heinen backdated the options for the Apple Executive Team to January 2001 for a lower strike price of $16 per share. Heinen identified the options as “at the money,” as if the options were granted in January. This resulted in Apple’s financial statements concealing almost $19 million in compensation to the Executive Team.

The second instance of alleged fraud occurred in December 2001 when Apple stock traded at just over $21 per share. Heinen backdated 7.5 million shares, destined for Jobs, to October 2001 for a lower strike price of $18.30. According to the SEC, Heinen then fabricated phony minutes that purported to show a board approval of the option grant. Once again, Heinen did not properly expense the options because they were, “in the money.” The end result: Heinen concealed $20.3 million of compensation to Jobs.

On August 14, 2008, Heinen settled her case with the SEC for $2.2 million, without admitting or denying SEC allegations. Heinen agreed to a court order that:

• Enjoins her from violations of Section 17(a) of the Securities Act of 1933 and Sections 10(b), 13(b)(5), and 16(a) of the Securities Exchange Act of 1934 and Rules 10b-5, 13b2-1, 13b2-2, and 16a-3 thereunder, and from aiding and abetting violations of Sections 10(b), 13(a), 13(b)(2)(A), 13(b)(2)(B), and 14(a) of the Securities Exchange Act of 1934 and Rules 10b-5, 12b-20, 13a-1, 13a-13, and 14a-9 thereunder;

• Orders her to pay disgorgement of $1,575,000 (representing the in-the-money portion of the proceeds she received from exercising backdated options) plus $400,219.78 in interest;

• Imposes a civil penalty of $200,000; and

• Bars her from serving as an officer or director of any public company for five years.

Finally, Heinen agreed to a separate administrative order that “suspends her from appearing or practicing before the Commission as an attorney for three years.” Former Oracle General Counsel, Daniel Cooperman, replaced Heinen in late 2007 and now serves as Senior Vice President, General Counsel and Secretary of Apple.

Full post as published by The Race to the Bottom on October 22, 2008 (boomark / email).