Analysis: Apple SEC case playing out in public
Legal and business experts will have a lot to learn from how the case against former Apple lawyer Nancy Heinen grinds its way through the courts.
Because most cases of stock options backdating by U.S. public companies have been settled out of court, and because Heinen is planning to fight her charges, the case could be one of few played out in open court, legal analysts say.
Heinen was charged by the U.S. Securities and Exchange Commission (SEC) Tuesday with violating federal securities law for her part in falsifying documents about the backdating of stock options grants to Apple executives in 2000 and 2001.
Former Apple Chief Financial Officer Fred Anderson reached a settlement with the SEC over his part in the case. The SEC, in a suit filed in Federal District Court in San Jose, California, said while Anderson didn’t participate in backdating activities, he should have been more aware of what was going on as CFO.
Heinen’s attorney Miles Ehrlich refuted the allegations in a prepared statement: “To suggest that Ms. Heinen engaged in fraud is to misunderstand the facts of what happened.”
That there are facts in dispute should make for some interesting courtroom testimony if the case comes to trial, said Steve Kaufhold, a securities litigator and partner in the San Francisco office of law firm Akin Gump, LLP. Neither he nor his firm is a party to the Apple case.
“This is a significant case in that Apple is such a high profile company and there seems to be such a disagreement over what the basic facts are,” said Kaufhold.
Stock options backdating becomes a legal problem when the granting of options isn’t adequately accounted for or fully disclosed to shareholders.
Heinen is alleged to have falsified board meeting minutes to make it look as though the board approved stock options grants in 2000 and 2001 on dates that the board hadn’t met.
Ehrlich says Heinen didn’t deceive anyone inside or outside of the company. “Every action Nancy took was fully understood and authorized by Apple’s board,” Ehrlich stated.
The SEC complaint is a civil action. The U.S. Department of Justice (DOJ) is conducting its own investigation of Apple and other U.S. companies, which could result in the filing of federal criminal charges.
What is believed to be the first criminal trial over backdating is set for later this year when Brocade Communications Inc.’s case is scheduled in federal court, also in San Jose.
Former Chairman, President and CEO Gregory Reyes and former Vice President of Human Resources Stephanie Jensen are charged with securities fraud for backdating irregularities at the maker of computer networking equipment.
Although the SEC has spent months investigating Apple, interviewing witnesses and pouring over “gigabytes” of documents, Kaufhold said, it seems to have reached the same conclusion a special board audit committee reached in December 2006. Its investigation concluded that while Jobs knew of backdating and approved specific dates, he was not aware of the accounting implications of those moves. The board committee implicated two unidentified former employees in the fraud. Eventually, those two were identified as Heinen and Anderson.
“It appears to me as though [the SEC] moved against the people served up by the special committee,” he said.
But the SEC findings seem to make Jobs look good, said Paul Bessette, another Akin Gump securities partner at its Austin, Texas, office. His office is representing companies implicated in backdating, though not Apple, including cases in which CEOs have agreed to resign to avoid trial.
Bessette notes that when Jobs was interviewed for the internal probe and the federal investigations he came off as credible.
“I could contrast that with other CEOs who may…. not have been fully up front in the interviews, so they are in a position where some credibility issues are called into question,” he said. “I think [the SEC] can piece together a good trail [of evidence] and what this suggests to me is that there is very little trail running to Steve.”