Will Jobs Keep His Job?

April 26, 2007 — -- Apple, the giant technology company, says its CEO, Steve Jobs, has done nothing wrong.

And while the government this week alleged that there was securities fraud at the company, it placed the blame squarely on Apple's former chief financial officer Fred Anderson and former general counsel Nancy Heinen.

But now the former CFO says that Jobs knew more than he is letting on.

Jobs is a long way away from losing his post -- industry watchers were extremely reluctant to speculate about his future -- but dozens of top executives involved with backdating at their own companies have been forced to leave.

Nobody but Anderson is saying that Jobs has done anything wrong, but even the remote possibility of his departure has left some investors struggling to imagine a post-Jobs world at Apple.

"Steve Jobs is synonymous with Apple. In reality if he isn't there, the company is a totally different company," said Tim Bajarin, president of Creative Strategies, a technology consulting firm. "He is the heart and soul of Apple, and without Jobs' driving vision and innovation, Apple would most likely be just another computer company."

Bajarin said prior estimates said that Jobs had added $20 billion to the company's overall value.

Even with this cloud hanging over the company, sales are still strong at Apple.

The company's extremely popular iPod continues to fly off store shelves, and sales of Macintosh computers remain strong. There is also a lot of hype surrounding the company's forthcoming release of the iPhone, a cell phone, personal organizer and MP3 player that allows users to surf the Web and check e-mail.

Wednesday afternoon the company released its quarterly earnings, showing an 88 percent increase that sent its shares higher than $100 for the first time.

So, amid the prosperity, who is responsible for Apple's backdating, and is it possible that it could still ultimately hurt a company that seems otherwise invincible these days?

The Backdating Problem

The company's backdating scandal stems back to 2001. At that point, some Apple executives, including Jobs, were given backdated stock options -- meaning the company allowed the executives to exercise stock options on dates that would be most financially advantageous, possibly illegally.

An internal inquiry by the company cleared Jobs of any wrongdoing, but the Securities and Exchange Commission continued to investigate.

On Tuesday the SEC announced that it was filing a securities fraud lawsuit against two Apple executives: Anderson and Heinen.

On the same day, it was announced that Anderson had agreed to pay $3.5 million in fines to settle his suit. Heinen is fighting the charges.

Some industry watchers believed that the exclusion of Jobs in the SEC announcement had exonerated him and would allow the company to move on.

But that sentiment was quickly shattered when Anderson asserted that Jobs had been personally involved in the backdating scandal, renewing speculation on whether Jobs' role could have legal ramifications for the CEO.

The SEC has not commented on whether Anderson's allegations might further implicate Jobs.

Jobs sits on the board of directors for the Walt Disney Co., parent company of ABC.

So What Is Backdating?

Stock options are often given to executives as a form of compensation. The holder of an option is allowed to purchase stock at a later date at a price set when the option is granted.

For example, a company president could be given the option to purchase 100 shares at $20 each on March 1. This price -- called the "strike price" -- is determined by the market value of the shares on the date of the grant.

If a company's stock rose to $25 in June, that executive could "exercise," or buy, the 100 shares at the strike price of $20, immediately realizing a profit of $500 if they sold the options. If the price dropped, the person would not have to purchase the shares at all.

The idea behind giving executives stock options is that it gives them a personal incentive to have the company's stock price rise.

But some companies went one step further by backdating those options, effectively setting the strike price lower than it should have been.

Under that scenario, an executive is given the option to purchase those same 100 shares in March. But instead of using the March 1 stock price as legally required, the company would say the options were issued on Feb. 5 when the stock price was $17 a share -- effectively "backdating" the options.

Beyond Apple

The options backdating scandal goes well beyond Apple.

The Wall Street Journal, which recently won a Pulitzer Prize for its coverage of the issue, says that 140 companies have been implicated and that 80 executives have lost their jobs.

"In terms of the culture in general, we're talking about something that started during the '90s. Everybody was doing it," said Alexandra Higgins, senior compensation analyst with the corporate governance research firm The Corporate Library. "You'll find people who will admit to that. They didn't really think they were doing anything wrong because everybody was doing it."

"That's not to say that's [an] excuse, but that's how the practice perpetuated," she said.

The old saying on Wall Street is: Buy low, sell high.

The problem is, investors never know when a stock is going to go up or down. With backdating, though, company executives are guaranteeing that they are buying low.

"They intentionally went to a date, prior to the date of grant, where they saw their stock price was at a low," Higgins said. "Shareholders don't have that option."