- The Washington Times - Wednesday, December 27, 2006

Shares of Apple Computer Inc. went on a wild ride yesterday as prices plunged 5 percent — and then recovered — on news that the IPod maker is the subject of a federal probe into whether company officials falsified stock-option documents to sweeten gains for executives.

The computer giant discovered the fake documents during a three-month internal investigation that ended in October, according to the Recorder, a San Francisco legal newspaper. Federal prosecutors are considering filing criminal charges, and the Securities and Exchange Commission (SEC) would bring any civil case, the newspaper reported, citing unnamed sources.

Apple disclosed in October that a special board of directors committee had found “irregularities in past stock option grants,” but the Cupertino, Calif., firm did not elaborate or mention any falsified documents. In that announcement, the company said it backdated options in 15 cases between 1997 and 2002.

The stock closed up by a penny to $81.52 on Nasdaq yesterday after dropping to as low as $78.30 in midmorning trading.

Steve Jobs, Apple’s chief executive officer, was aware of backdating in some instances but did not benefit, the company said in October.

Mr. Jobs has hired an attorney outside the company to handle inquiries from the SEC and Department of Justice, the Recorder said.

Share prices rebounded in the afternoon as several analysts reaffirmed their positive ratings of Apple and rejected speculation that Mr. Jobs’ position with the company was at risk.

“We have to assume that if the board had determined that actions taken by Steve Jobs had raised ‘serious concerns,’ they would not have stood behind current management,” analyst Shannon Cross wrote for Soleil Securities Group Inc.

Apple spokesman Steve Dowling would not comment beyond the company’s financial filings. Apple is expected to provide more details when it files its annual report with the SEC tomorrow.

Apple joins nearly 200 other companies undergoing federal scrutiny for backdating stock options, according to a Bloomberg News estimate that says at least 69 executives have lost their jobs as a result of such investigations.

Backdating option grants to maximize their value is not necessarily illegal.

“The question is what type of backdating did they do, and what are the consequences of it?” said David Martin, former director of the SEC’s Division of Corporate Finance and a partner with D.C. law firm Covington & Burling LLP.

The practice generally is allowed as long as executives properly account for backdated options, which must be issued according to a company’s board-approved plan.

“A lot of the press today has sort of portrayed [backdating options] as being an indication of widespread fraud, intentional misconduct on the part of the corporation. The truth in fact is, while some of this may fall into that category, much of this is going to fall into the category of poor procedures, a breakdown in control — not intentional misconduct,” said Hal Degenhardt, a partner in the Dallas office of Fulbright & Jaworski LLP and a former Fort Worth district administrator with the SEC.

Unlike a civil suit, a successful criminal case would require the government to establish intent. In the case of Apple, falsified documents could give federal prosecutors the necessary evidence.

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