Apple Computer Inc has become the latest tech company to admit it may have manipulated stock options to the benefit of executives, including its high profile chief executive Steve Jobs.
While Cupertino, California-based Apple is hardly alone in what has become a wave of stock option scandals in the industry, it is among the largest companies to be implicated. Jobs’ image as the icon of the Macintosh computer may be tarnished.
For sure, the uncertainty such investigations create is reverberated on Wall Street. And the time and money Apple and its peers are being forced to spend on scouring through past accounting practices is, at the very least, unwelcome.
So far, 57 companies have announced potential stock option irregularities, of which nearly half are based in Silicon Valley. Thousands of tech companies of all sizes in the Valley have long used stock options to lure talent.
In the last week of June alone, CA, business software maker Intuit and data center vendor Equinix, both Silicon Valley-based, announced they had been subpoenaed by the US Securities and Exchange Commission over their stock option practices.
It is our belief that similar subpoenas have been served on many of the companies named in a recent report from the Center for Financial Research and Analysis (CFRA), said Mountain View, California-based Intuit Inc, in a statement.
The probes are part of the SEC’s investigation to determine whether companies inflate stock options’ value granted to executives by backdating grants to when the stock’s price was trading at a lower value. There also are questions over whether companies timed the grants to coincide with periods of low stock prices.
In doing so, stock option holders stand to make more money in the long term, given the grants become more valuable as the stock price rises. While timing stock option grants to the market is not illegal, the SEC contends it may result in underreported executive compensation, which means inflated profits and underpaid tax bills.
Backdating options may also raise red flags about the accuracy of past earnings statements.
Apple said it was internally investigating grants made from 1997 to 2001.
One of the grants in question was to CEO Steve Jobs, but it was subsequently canceled and resulted in no financial gain to the CEO, Apple said, in a statement.
The company said it notified the SEC and has hired an independent counsel to undertake the investigation. It did not name other executives implicated in the investigation.
Apple is a quality company, and we are proactively and transparently disclosing what we have discovered to the SEC, Jobs said, in the statement. We are focused on resolving these issues as quickly as possible.
Apple shares dropped nearly 3% to close at $52.27 on the Nasdaq following the news. By press time, it had gained a few cents in after-hours trading.
For Islandia, New York-based CA Inc, the possibility of a stock options misstep means it has to again delay filing its 10-K quarterly earnings report to the SEC. It will miss its June 29 deadline, which was already extended from June 14.
In late May, CA initially pushed back its earnings report because it failed to correctly record sales commission expenses.
The news of the latest delay spurred Fitch Ratings to cut its ratings on the software management vendor and Moody’s Investors Service said it was considering doing the same. Both stock-watching firms cited CA’s internal control issues and potential debt acceleration as reasons for junking the stock.
CA said there were delays by as much as two years from when stock options were approved by its board to when the grants were communicated to employees.
These delays could result in the need to recognize additional non-cash stock compensation expenses over the vesting periods related to such grants, CA said, in a statement.
As a result, the pre-tax amount of the non-reported employee compensation was less than $20m year in its fiscal 2005 and 2006, CA said. Between 1997 and 2002, however, the company estimated more than $200m worth of previously unaccounted compensation.
We are disappointed that we cannot file our 10-K to meet the extended deadline and that we continue to find problems associated with CA’s past, said CA chief executive, in a statement.
However, delaying the filing is our only option until we understand the full impact of the legacy stock option issue and any potential financial adjustments office.
Shares in CA fell slightly more than 1% to $20.55 on the New York Stock Exchange following the news. The price dropped further in after-hours trading to $20.12 by press time.