U.S. Scrutinizes Grant to Jobs

Federal authorities are actively investigating a backdated stock-option grant awarded to Steve Jobs, Apple Inc.'s chief executive, that carried a false October 2001 date, people familiar with the matter say.

Apple recently disclosed that records were "improperly" created to claim that the grant was approved at a special board meeting that month. But no board meeting took place then.

Investigators are now focusing on the grant to Mr. Jobs for 7.5 million options that were finalized in December 2001, when Apple's share price was higher. The false dating increased the value of the grant to Mr. Jobs, and resulted in a retroactive $20 million charge to Apple's earnings when it was discovered by a special internal investigation.

People familiar with the matter say the false documentation was created by an Apple attorney named Wendy Howell, whom the company quietly dismissed last month. Ms. Howell contends that Apple's general counsel at the time, Nancy Heinen, instructed her to create the false documentation, these people say. Thomas Carlucci, Ms. Howell's attorney, said that while at Apple "Ms. Howell acted as instructed by Apple management and with the company's best interest being paramount."

WALL STREET JOURNAL VIDEO

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WSJ's Gary Putka discusses new developments² in the federal probe into the stock options dispute involving Steve Jobs and other Apple Inc. executives.

Ms. Heinen left Apple in May for reasons that were unrelated to backdated options, a person familiar with the matter says. Her attorney, Cristina C. Arguedas, says Ms. Heinen didn't knowingly engage in any wrongdoing and denies she instructed Ms. Howell to falsify documentation. Ms. Arguedas said in a statement that "each of the option grants involving Ms. Heinen was authorized and approved by her superiors."

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Investigators with the Securities and Exchange Commission, working with federal prosecutors, are seeking to question Ms. Howell and Ms. Heinen, but neither has agreed to questioning so far, say people familiar with the matter.

Authorities want to speak to Fred Anderson, Apple's former chief financial officer. It also remains unclear whether Mr. Anderson, who resigned from Apple's board in October, will agree to talk. An attorney for Mr. Anderson has said, "As CFO, Fred did not play any day-to-day role in the granting, reporting and accounting of stock options and he was not involved in any knowing manipulation of the process."

Apple's backdated stock options are the subject of criminal and civil probes by the U.S. attorney's office in San Francisco and the SEC. A decision on whether to bring criminal charges in the Apple case isn't expected for months.

Apple spokesman Steve Dowling declined to comment, except to repeat that the company has provided results of an internal options investigation to the SEC and U.S. attorney and that the investigation cleared Mr. Jobs of misconduct.

An option gives its holder the right to buy a stock at a fixed, or exercise price, usually for up to 10 years after the date of the grant. By backdating the grant -- or pretending it was made earlier than it really was -- the employee gets an instant boost to the potential profits from the award. The practice can violate securities laws and accounting rules.

In a March 2002 proxy statement, Apple told its shareholders -- wrongly -- that the 2001 grant to Mr. Jobs was made at fair market value on the date of grant. On Aug. 8, 2002, Mr. Jobs personally signed a routine disclosure statement to the SEC bearing the false price, and false date of Oct. 19, 2001, for the grant. Apple has said the grant wasn't finalized until December of that year, when Apple's share price was higher. An Apple spokesman declined to comment on the matter.

• The News: Federal authorities are actively investigating a backdated stock-option grant awarded to Apple's chief executive, Steve Jobs.

• The Issue: Whether Mr. Jobs or or present or former Apple officials violated federal criminal or civil securities laws.

• What's Next: Investigators are seeking to question Apple's former general counsel and another former company lawyer, as well as its former chief financial officer.

Apple has said it found no evidence that Mr. Jobs or any other current executives were aware of the false records surrounding the October 2001 grant. It also says Mr. Jobs didn't understand the accounting implications of backdated grants, and didn't financially benefit from them because he never exercised his options. He did later exchange all of the options for restricted stock eventually worth hundreds of millions of dollars.

Apple has disclosed that Mr. Jobs recommended "favorable" dates for some options awards, although people familiar with the matter say he didn't pick any dates for grants that he received. Apple also has said that 6,428 grants of options on 42 dates between 1997 and 2002 were improperly dated. Last month, it restated its financial results between 1998 and 2006, taking $84 million in charges for the improperly dated options, including $20 million connected to the 2001 grant to Mr. Jobs.

Under accounting rules, no grant is actually made until final terms, including price, are settled and final approval is given by a company. Apple has said that its board "originally approved" the grant dated in October 2001 on Aug. 29 of that year when the stock was trading at $17.83. But according to a person familiar with the situation, Mr. Jobs wasn't satisfied with the terms of the grant in August and negotiations continued for months. Apple has said the grant was finally authorized by the board on Dec. 18, 2001.

On that date, the stock was trading for $21.01. The grant, however, was backdated to Oct. 19, when the share price was $18.30. Apple hasn't disclosed any details surrounding the decision to backdate the grant. Two people familiar with the matter say the October date coincided with a meeting of the board's compensation committee. The committee, however, didn't ISSUE the grant at the meeting, they say. According to Apple's practice, the full board was required to approve stock-option grants to the chief executive.

Apple's compensation committee had been formed in August 2001. Since April 2000, the entire Apple board handled compensation-related chores, including stock-option grants. The new committee was composed of Intuit Inc. Chairman William Campbell, former International Business Machines Corp. Chief Financial Officer Jerome York and Genentech Inc. CEO Arthur Levinson.

Ms. Howell, who joined Apple fresh out of law school around 1997, was in charge of stock-options administration. Ms. Heinen, as general counsel, oversaw Apple's legal department and also served as the board's secretary.

Ms. Howell's role in the October 2001 grant was reported by the Recorder, a San Francisco-based legal publication.