Options Snag Leads Apple to Restate Earnings

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Apple Computer has been a Wall Street favorite in recent years, but today investors were selling off shares of the company. The reason, Apple's announcement yesterday that it's widening an internal review into the backdating of its stock options. U.S. officials say they're investigating more than 80 companies over options backdating.

As NPR's Jim Zarroli reports, Apple is the most prominent company by far to be swept up in the scandal.

JIM ZARROLI reporting:

Apple has already acknowledged that it found evidence of problems in the way it granted stock options. Yesterday the company said it had uncovered further irregularities and was likely to have to restate its earnings going back to September 2002.

Henry Hu teaches securities law at the University of Texas.

Mr. HENRY HU (University of Texas): This is really quite remarkable for a company, you know, of the size of Apple and the quality of Apple.

ZARROLI: Apple gave few details about what it had found. Like many tech companies, Apple has made liberal use of stock options over the years. A stock option gives an employee the right to buy shares at a predetermined price as a kind of performance incentive.

If the stock value rises, the employee can reap a big profit. But U.S. officials say there's evidence that an unusually large number of companies have granted options on days when their shares were trading at a low price. That suggests the options might have been backdated to give the recipients an even bigger profit. Backdating isn't necessarily illegal as long as the company's books accurately reflect the transactions, but investors are worried that some companies might have concealed what was happening.

Patrick McGurn is executive vice president of Institutional Shareholder Services.

Mr. PATRICK MCGURN (Institutional Shareholder Services): Only about 40 companies, I guess, have come out, in essence, and announced that they're under formal investigations. That leaves a large deal of question marks out there as to what other companies have already received notices from the Securities and Exchange Commission, and so people are trying to fill in the blanks now.

ZARROLI: What's disturbing about Apple's case is that the company first tried to downplay the seriousness of its backdating problems, says technology analyst Rob Enderly. And he says the fact that the company has acknowledged the irregularities went further than it first thought suggest the board might have been unaware of what was happening.

Mr. ROB ENDERLY (Technology analyst): Typically when the audit committee's in the dark, it means that somebody made a fairly serious mistake or that there was, in fact, some intent to conceal the information.

ZARROLI: Enderly says he believes this probably was just a mistake on Apple's part, but there's plenty of uncertainty. Perhaps the biggest question is the role of Apple's founder and CEO Steve Jobs. In June, Apple said Jobs had received one of the options grants in question, but that it was later cancelled and Jobs never profited from it.

But he was given five million shares of restricted stock in exchange for the options. Rob Enderly says that the backdating scandal probably won't hurt the company in the long run.

Mr. ENDERLY: Unless it pulls Steve Jobs out of the CEO role, which is unlikely, this really doesn't affect the competitiveness of the company at all. These are events that occurred years back. They have to do with accounting magic as opposed to the actual performance of the firm.

ZARROLI: Still, Apple's acknowledgement that it will probably restate earnings throws the value of its shares into question, and for now the company is facing pressure to get to the bottom of things.

Jim Zarroli, NPR News.

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