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Apple Hit by Second Wave of Options Backdating Suits

A second wave of shareholder suits in California charges that the board of Apple Computer Inc. changed the dates on more than $1 billion worth of stock options so that CEO Steve Jobs and other executives could reap millions of dollars in "unlawful" profits.

The complaint filed by the AFSCME Employees' Pension Plan, one of the nation's largest public-employee pension funds, is typical of the second round of suits and expands on the charges made in the first set of federal and state court actions filed in July.

First Round of Lawsuits

Those first suits came in the wake of Apple's June 29 statement that it may have to restate its financial results for several years and that it was investigating reports that stock options had been misdated for nearly a decade.

Stock-Option Backdating

The lawsuits are part of a recent nationwide wave of shareholder actions filed after the Securities and Exchange Commission and New York's attorney general announced they were investigating the practice of stock-option backdating at more than 80 major corporations.

Those lawsuits generally allege that corporate boards changed the date of stock-option grants to pick a low point in the stock's price history so that the recipients would pay less and thus profit more at the shareholders' expense.

Many of the suits are derivative, seeking to force the defendant officers and directors to individually repay the money they allegedly wasted.

Improper Collusion?

The recent suit by the AFSCME pension plan, an Apple shareholder, details a "striking pattern" of stock options allegedly given to 15 Apple executives shortly before long downturns in the company's stock price increased by as much as 48 percent.

This was not the product of exceptionally good luck, but rather the result of improper collusion between officers and directors to assign bogus dates to stock-option grants so it would appear that the officers received them when Apple's stock was at an extreme low point, AFSCME's suit charges.

The defendants breached their fiduciary duty when they unjustly enriched the option recipients and broke federal and state securities laws when they filed false financial statements that failed to disclose the true cost of those stock options, the pension fund alleges.

Moreover, the directors who were members of the company's compensation and audit committees had an even greater duty to the Apple shareholders, but they failed to keep proper records and operate within accepted accounting guidelines, the suit charges.

The suit, filed in the U.S. District Court for the Northern District of California, names Jobs, 14 other current and past executives, and all of Apple's seven directors except former Vice President Al Gore.

Pre-Suit Demand

Since AFSCME and the other plaintiffs are suing Apple derivatively, or on behalf of the company, they must comply with the "pre-suit demand" requirement of Delaware and other states that model their corporate law after that state's.

Generally, derivative plaintiffs must either give the directors of the company an opportunity to review the charges and take corrective action or show why the directors lack the independence and objectivity to fairly consider the allegations.

AFSCME says it chose to skip the review process because six of the seven directors "are incapable of independently and disinterestedly considering a demand."

The suit asks the court to force the defendants to reimburse the corporate coffers for the cost of the backdated options.


AFSCME also wants Apple to adopt a series of corporate-governance reforms that would result in tighter controls on spending, a more independent board and a more transparent management process with greater shareholder input.

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