Nancy Heinen, Former Apple General Counsel, Settles Backdating Charges
Posted by: Arik Hesseldahl on August 14, 2008
Nancy Heinen, Apple’s former general counsel has settled civil charges brought by the Securities and Exchange Commission in 2007, the commission announced today.
The settlement calls for Heinen, who had served as Apple’s general counsel from 1997 until her departure in mid-2006, to pay $2.2 million in disgorgement, interest and penalties, and to be barred from serving as an office of a public company for five years. Under terms of the settlement, she has neither admitted nor denied any wrongdoing.
Heinen had been accused by the SEC of being responsible for the backdating of two big blocks of stock options grants to Apple executives, a matter that had cast a pall over the company it first disclosed the matter in June of 2006, about a month after Heinen’s departure. The SEC said that company records pertaining to a grant of 4.8 million options to Apple’s senior executive team in February of 2001, and a grant of 7.5 million shares made to CEO Steve Jobs in December of 2001 had been altered to conceal what it called a fraud. The result was that Apple underreported its stock-related expenses by nearly $40 million.
In the case of the first grant, the SEC said, six executives including Heinen, received options that were in-the-money, meaning their strike price was lower than the actual share price on the date of grant.
Apple was required to report the $18.9 million difference as a stock-based compensation charge in regulatory filings, but didn’t. The commission had accused Heinen of backdating the options to Jan. 17 when the price of Apple’s stock was lower, and, was also accused of having directed underlings to prepare documents showing that the grant had been properly approved by Apple’s board of directors when it had not.
Heinen’s lawyer, Cris Areguedas had argued that Heinen hadn’t backdated the options to the Jan. 17 date as the SEC alleged, but had been laboring under the impression that the grant had been properly approved by Apple’s board in late 2000, and was only pushing back the grant date, which was legal under rules in force at the time. Her intent, Arguedas said, had been not to defraud Apple investors but to help the company avoid the appearance of having “spring-loaded” the options in advance of a an important Steve Jobs keynote address at the 2001 MacWorld Expo in San Francisco.
In the second case, Heinen had been accused of signing fictitious board meeting minutes concerning a “special board meeting” that had never taken place, that reflected the approval of directors of a grant to Jobs. Again the difference, $20.3 million in this instance, wasn’t properly reported in regulatory filings.
In this instance, while the SEC complaint implied that Heinen believed the proper grant date was Aug. 29, but when Jobs complained about the vesting schedule, and had wanted some of the options in the grant to be “pre-vested” meaning he would have been able to exercise them right away. As a November 2001 deadline for properly reporting the expense neared, Heinen became concerned about the delay, the SEC complaint said, and looked for a data where Apple’s share price was close to the $17.83 price of Aug. 29. She chose Oct. 19, when the stock was at $18.30, but less than $21.01, its price on the actual grant date of Dec. 18, thus creating for Jobs, an instant paper profit.
The settlement would appear to bring final closure to the matter of Apple’s relatively minor backdating issue. During parts of 2006 and 2007, the matter had caused Apple investors some anxiety that Jobs might be targeted by the SEC either for civil charges or by the U.S. Department of Justice for criminal charges. The amount of money involved - less than $40 million - was in fact minimal to Apple, who during the its fiscal years 2006 and 2007 had reported sales of $20 billion and $24 billion respectively, and whose cash horde had exceeded $15 billion by the close of its 2007 fiscal year.
The matter had been expected to come to trial in the federal court for the Northern District of California this year, and would have likely generated substantial media attention because Jobs, having been subpoenaed in 20007 was expected to appear as a witness.
The settlement also means that Heinen’s version of events will likely not be aired in public. When Apple’s former CFO Fred Anderson settled charges related to the matter in 2007, he issued a public broadside at Apple and Jobs in particular. At the time Anderson, through his lawyer, said that he had warned Jobs that the company would need to record a charge for the options granted Apple executives in early 2001.
Anderson’s version of events would seem to contradict Apple’s version of events, which it announced in October of 2006, after an investigation by a special committee of its outside directors concluded that Jobs didn’t fully appreciate the accounting implications of the matter.
