SEC Charges Former Apple Counsel with Fraud; Former CFO Settles

The US Securities and Exchange Commission this afternoon has charged former Apple general counsel Nancy Heinen with fraud, alleging that she participated in the underreporting of corporate expenses by $40 million. That underreporting is allegedly on account of having backdated options grants to Apple executives, including CEO Steve Jobs.

Also, in exchange for a settlement of what would likely have been a charge of gross negligence, with no obligation to admit guilt or innocence, former Apple Chief Financial Officer Fred Anderson told the SEC that Jobs gave him his personal assurance in January 2001 that a grant of stock options to Apple's executive team had already been approved by the Board of Directors.

"Apple's shareholders relied on Heinen and Anderson, as respected legal and accounting professionals, to ensure the accurate reporting of the company's executive compensation," said SEC San Francisco regional director Mark Fagel, in a prepared statement this afternoon. "Instead, they failed in their duties as gatekeepers and caused Apple to conceal millions of dollars in stock option expenses."

Backdating (or forward-dating) options is actually not illegal, even if it ends up profiting the bearers of the falsely reported options. However, failure to record the charges of options grants against expenses is illegal. Oftentimes companies are charged with fraud as a whole, but apparently in exchange for Apple's cooperation, the SEC is charging an individual instead.

In a statement issued this afternoon by Anderson's attorney, Jerome Roth, he says Anderson cautioned Jobs in late January against making a grant of 4.8 million options to six members of the company's executive team, apparently not including Jobs.

"At the time Mr. Jobs provided Fred this assurance, Fred cautioned Mr. Jobs that the Executive Team grant would have to be priced based on the date of the actual Board agreement or there could be an accounting charge," Roth writes. "He further advised Mr. Jobs that the Board would have to confirm its prior approval in a legally satisfactory method. He was told by Mr. Jobs that the Board had given its prior approval and the Board would verify it. Fred relied on these statements by Mr. Jobs and from them concluded the grant was being properly handled."

One important point Roth's statement carefully avoids is that Anderson was a member of this executive team and a co-recipient of the grant, along with Heinen.

Anderson believed the initial date of the options grant to have been January 2, Roth's statement reads, though Anderson was said to be under the impression that if he reported the date of the as-yet-unrecorded grant as January 17, it would still be following Apple's rules so long as the company's stock price on the 17th was higher. And that it was, especially since Jobs' keynote speech at MacWorld was on January 9. Roth says Anderson's move helped eliminate the appearance of impropriety; if he had recorded the grant date as the 9th, Roth wrote, it might have appeared as if Jobs and other executives were taking advantage of the stock price rise, by issuing themselves grants enabling them to purchase current-day stock at the lower January 9 prices.

According to the SEC, Apple was obligated to record those charges as compensation expenses, which should have totaled $18.9 million.

Roth's statement goes on to say Anderson believed Jobs and former general counsel Nancy Heinen jointly selected the January 17 date, and that the board of directors consented to that date later in February. As it turned out, the board did not give prior consent to the initial grant, which meant that the exercise of those options ended up being more valuable to their bearers than they might have been otherwise.

Anderson has agreed to disgorge the surplus value, which amounts to the rise in value between January and February - according to the SEC, $3.49 million, plus $150,000 in fines.

Heinen is also accused of arranging a grant of 15 million options to Jobs in December 18, 2001, which was backdated to Apple's October 19 stock value. An internal Apple investigation last December revealed that board meetings that are recorded on Apple's books as having approved this particular grant, never actually happened. What's more, another $20.3 million in compensation expenses were never recorded.

Anderson had no role in this later grant, Roth says, as the CFO was not a member of the board of directors. Heinen is being officially charged with violation of antifraud provisions of securities laws, lying to Apple's own auditors, and violating prohibitions and circumventing internal controls of a public company. A statement from Heinen's attorney to the press this morning denied she backdated options, though it did not go on to take a position on the alleged falsification of board meeting minutes.