Full of sound and furry
Serlet sells some stock.
Bertrand Serlet sold what the Macalope calculates on the back of a napkin to be about $5.5 million in shares and options on Dec. 29th.
Not sure what the implications might be but he was clearly picking the last day of 2006 for tax purposes.
Or, possibly, to impress chicks on New Year’s Eve.
“Pardon, cherie, but ‘ave yoo ever seen a $10,000 bill?”
Options expert’s comments on how fairly Jobs has been treated.
BusinessWeek’s Peter Burrows talked with options expert Erik Lie. Lie doesn’t think Jobs is necessarily out of the woods, but the Macalope found the last graph most interesting.
I then asked if he thought Jobs was getting an easier time than the dozens of other executives that have lost their jobs over the backdating scandal, simply becuase of Jobs’ celebrity and iconic reputation with investors and consumers. He said no. Rather, he pointed out his belief that there are many executives that have flouted options accounting rules that have not yet even been identified. “I believe there are potentially thousands of executives who have gotten completely off the hook. Because he’s steven jobs, he’s more in the spotlight….The media has been struggling to put a face on this scandal. If anything, he’s been treated unfairly relative to other people who have been completely unscathed.â€
The Macalope has been harder on Jobs and Apple over the backdating of options than many other members of the Apple community, but he thinks Lie is absolutely correct here.
And you can scroll down for his “Martha Stewart” comment below as evidence that this isn’t a case of the tail wagging the Macalope.
Apple report to the SEC continues to exonerate Jobs.
Apple Says Options Probe Exonerates Executives
Apple Computer today exonerated its chief executive, Steven P. Jobs, of any wrongdoing in a stock options backdating probe.
Sometimes it’s hard to be a woman
Giving all your love to just one man
You’ll have bad times
As a result of the internal investigation, Apple said it would record $84 million in expenses related to the options awards.
And he’ll have good times
The news helped push shares of Apple up more than 5 percent this morning to just over $85.
Doin things that you don’t understand
But if you love him
You’ll forgive him
“The board of directors is confident that the company has corrected the problems that led to the restatement, and it has complete confidence in Steve Jobs and the senior management team,†the statement said.
Even though he’s hard to understand
And if you love him
Oh, be proud of him
Cause after all he’s just a man
But Mr. McGurn noted that Apple faced unique challenges.
“Apple is in a much more difficult position than other companies in the backdating morass, because a significant portion of its market valuation is based on Steve Jobs staying at his job,†he said.
Stand by your man
Give him two arms to cling to
And something warm to come to
when nights are cold and lonely
The language of Apple’s statement, coupled with the simultaneous resignation from the board of Fred D. Anderson, the company’s former chief financial officer, led analysts to believe that Apple and Mr. Jobs were attempting to distance themselves from any blame in the case.
Stand by your man
And show the world you love him
Keep giving all the love you can
Stand by your man
“Everything we know about Apple is that the compensation side is not something Jobs has ever been involved in,†Mr. Munster said. “The key thing, and the only thing Wall Street cares about, is whether Jobs will be impacted, and we don’t believe he will be.â€
Stand by your man
And show the world you love him
Keep giving all the love you can
Stand by your man
More options news.
Overnight the Financial Times reported that the forged stock option documents related to Steve Jobs’ grant of 7.5 million options in 2001.
The question now is, is it likely that Jobs knew that documents were being falsified for his granting of the 7.5 million options?
To the Macalope it seems highly unlikely that Jobs was not intimate with the details of his compensation, but most executives focus on “what am I going to get”, not the steps that might have been jumped over to get them there. Jobs, in particular, seems to be an individual who is comfortable as long as he knows he’s being handsomely rewarded for his Herculean efforts and only expects to make money if the company does well.
The company has stated that Jobs was not aware of the “accounting implications” involved. Is claiming something was approved at a board meeting when it was not an “accounting implication”? Possibly.
The Wall Street Journal’s Law Blog (paid subscription) asks today whether readers think Apple’s close-to-the-vest-approach or United Healthcare’s open approach is better. From an investor’s standpoint, clearly United Healthcare’s approach is better, but there are several hundred degrees of difference in magnitude between the two.
The United Healthcare executives were receiving salaries and colluding to cover up the backdating of hundreds of millions of dollars in stock options. Even if Jobs is implicated in the forging of the documents related to his relatively paltry 7.5 million options — options he was ultimately given a market value for but never actually exercised and no longer owns — it’s questionable if it’s material enough to cause him to have to step down.
Still, criminal proceedings in high-profile securities cases often turn on more than intent and the relative level of benefit (see: Stewart, Martha). Apple could become the poster child for stock option backdating prosecution and, call the Macalope cynical, but with an SEC chairman appointed by the Republican rival of a Democrat on the board of the company, it’s got to be a tempting target.
Links to some bad news about Apple’s options problem.
Holiday’s over. Here’s your rude awakening.
Apple reportedly falsified options documents.
Original Law.com piece by Justin Scheck with the allegations here.
It looks like the meat of the information relates to possible wrongdoing by former execs Nancy Heinen and Fred Anderson. While there are number of “if the SEC is going to go after Steve Jobs” type statements, there’s absolutely no information that implicates Jobs in the falsification of these documents.
While it will likely take some time — perhaps a matter of months — for the government to decide whether to file criminal charges against Jobs, the 10(k) filing on Friday should provide plaintiffs lawyers with some ammunition for their suits against the company.
Hey, if he’s done nothing wrong, it could take them years to decide as they would have to wait for him to do something wrong.
That is a rather irresponsible paragraph, unless Scheck knows something more that implicates Jobs. The only evidence provided is that he has retained his own legal counsel, which raises a few of the hairs on the Macalope’s velvety flanks, but is hardly damning given the fact that Jobs is personally named in the class action suit against the company.
We’ll know more on Friday.
UPDATE: Gene Munster of Piper Jaffray sez there’s less than a five percent chance Steve Jobs is at risk.
The Macalope likes those odds but how do you calculate that?
The Macalope holds an inconsequential number of Apple shares.
Apple hires new general counsel.
Apple hires Donald Rosenberg as general counsel.
Let’s just perform a little non-scientific experiment.
That’s what the Macalope thought.
The Macalope responds to MacJournals News.
MacJournals News responds to the Macalope’s response to their post about Mark Anderson’s post about Apple’s stock options.
The game is afoot! Let the response to the response to the response to the response to someone else’s post begin!
So MJN did not miss the point as the Macalope said, so much as it chose to discount it.
MJN also provides some history on Graef Crystal and seems think he’s largely just interested in bashing Apple executives as being overpaid. Indeed, Crystal does engage in some truly tasteless construction.
Apparently, an option of that size didn’t stir Jobs to new heights of performance. On the contrary, he fell on his face, with the stock price plummeting to $18.30 a share by Oct. 19, 2001.
It was on that latter date that Apple’s board decided that he needed more motivation. So he was handed a second option grant, this one covering 7.5 million shares and carrying a strike price of $18.30.
Hmm. Why would that be? Well, it could have something to do with the iPod, which was announced on…
October 23, 2001.
Hmm.
HMM!
Starting an entirely new line of business, the company might have decided Jobs needed to have his compensation structure tied to that. And, of course, in retrospect Crystal’s caterwauling about Jobs’ performance is pretty embarrassing.
Give Steve a minute, dude. He’s just warming up.
So the Macalope will concede that the messenger has an agenda, but from what he’s read, it comes from a general dislike of large compensation packages for corporate execs, not a dislike of Apple per se. Also, it doesn’t mean he’s wrong about everything.
Such as how the company valued the shares Jobs received in March of 2003 in exchange for his options.
MJN’s believes that, because Steve Jobs can’t trade his stock options to anyone, they’re worth nothing.
Jobs was not “given the present value for the options in March 2003 using an industry-standard means of calculation” anywhere but in Graef Crystal-world, where he’s been inventing fantasy numbers for Jobs’ compensation since 2000.
Crystal and other critics continually try to value Jobs’ options using the Black-Scholes method of determining the present value of a future asset.
Uh, that’s probably because it’s an industry-standard means of calculating the present value of stock options.
Well, you keep saying that, Macalope, but how “industry-standard” is it?
It’s so industry-standard it was one of the two models that the Financial Accounting Standards Board (the accounting rule makers in the U.S.) had proposed should be required for calculating how to expense stock options when they tried to make that the law of the land in the early 1990s (before congress gallantly stepped in and insisted that options not be required to be expensed).
It’s also so industry-standard that a 2002 Ernst and Young report (PDF) said:
As indicated in our past surveys, the overwhelming majority of companies use the Black-Scholes option-pricing model for determining the fair value of employee stock options. A small minority of companies uses the binomial pricing model.
So, that’s how industry-standard it is.
Thanks for asking, Billy.
That was Billy, the artificial argument construct, ladies and gentlemen. Let’s give him a hand.
[Yay, Billy!]
Now, one could argue it’s not the right model to use. Indeed, it has since been seen as having the tendency to overvalue the options and the FASB has advised companies take care in using it. But it’s still the primary one that has been used at least until recently and not just by people who want to beat Steve Jobs over the head as MJN implies.
But as experts like Crystal continually refuse to tell their readers, Jobs can’t trade his stock options. If they’re worth US$523 million, they’re worth that only to Steve Jobs [in his own personal satisfaction]. Apple employees and directors cannot transfer their stock options; they can only sell the shares themselves once the stock options are exercised. Remember that: those 27,500,000 shares are worth exactly US$0 to anyone other than Steve Jobs.
Actually, that’s not true. They’re also worth something to Apple and consequently its shareholders. And the reason experts “refuse to tell their readers that Jobs can’t trade his stock options” is probably because it seems so darned obvious.
MJN, the Macalope is left to surmise, believes Apple took the options back solely to reduce exposure and then gave Jobs an unrelated $75 million for his troubles, a number the company just pulled out of its ass*.
Their value on the “open market” is manifestly irrelevant because they could not be traded on the open market.
This is absurd. The options’ value is tied to Apple’s stock which is traded on the open market. If Apple had had to expense the options (which, ironically, is pretty much exactly what they ended up doing by allowing Jobs to trade them in for directly-owned stock), it would have valued them based on either the Black-Scholes model or the binomial model and expensed that amount.
It’s perfectly possible that Crystal botched one or both of his calculations of Jobs’ options (as MJN shows, he came up with two different numbers) or that he used different inputs for the model each time, either based on better information the second time or a desire to get it to come out closer to $75 million.
To quote Monty Python, “It’s only a model.” The results are going to vary drastically depending on the inputs (and the competency and intentions of the modeler). As for Crystal’s numbers, it’s probably best to point out that one could get those results from the Black-Scholes model and Occam’s razor being what it is…
The Macalope would fall down dead, his hooves sticking straight up in the air if he were to find that Apple didn’t derive the $75 million figure by modeling the present value of Jobs’ options in March of 2003. And he thinks it’s highly likely the company used the Black-Scholes model.
It’s an industry standard, don’t you know. Just ask Billy.
The Macalope’s only real error below is that he failed to add a qualifier such as “highly likely” to his comment that Jobs was given the present cost based on an industry-standard model.
It is theoretically possible Apple just pulled the number out of its ass. It’s just really unlikely.
* The use of “pulled the number out of its ass” in this piece is a deliberate exaggeration.
A response to MacJournals News’ charges on Mark Anderson’s analysis of Jobs’ options problem.
MacJournals News (antler tip to Daring Fireball) is the latest to rush to Steve Jobs’ defense in the stock options backdating imbroglio. Responding to a post by Mark Anderson, MJN writes:
To argue now, three and a half years later, that Jobs benefited because these options were underwater by US$30 per share instead of US$32 per share doesn’t pass the laugh test.
The Macalope is normally a fan of MJN’s work and is frankly shocked that it’s missed the point here.
The present value of the options is derived by a calculation based on an expectation of their future value, not based on the current trading price. Options that are “underwater” still have a value if there is a reasonable expectation that the price of the stock will rise.
As Graef Crystal has pointed out, Jobs was given the present value for the options in March 2003 using an industry-standard means of calculation. This value is calculated based on the strike price of the options, a price that was benefitial to Jobs. He received shares valued at $75 million. If he had received a less favorable strike price – such as that on the date he received the options – he would have received less in 2003.
Crystal calculated the current value of Jobs’ windfall to be $85 million.
In comments, Anderson responds to MJN’s post:
1. Although the options were indeed underwater, the point Greif [sic] Crystal (and other Wall Street analysts) made was that they were exchanged for other instruments, and so had some inherent value that was captured. Therefore, the underwater bit is irrelevant.
2. What Steve’s sale intent is or was is completely irrelevant to the question of legality. If I broke the speed limit, why I broke it won’t help me much.
Prior to that, Anderson speculates that Jobs:
- Did in fact receive tainted options.
- Did in fact exercise some of them, in some way, and receive personal benefit.
- Did in fact know about the backdating practice.
- You know, in this list, there is probably no need for a “d,†although being involved in approval of the transaction would be a definite zinger.
The Macalope is not inclined to agree with Anderson’s probably tongue-in-cheek contention that Apple would have been better off just outright lying about its backdated option grants, but, sadly, he is inclined to suspect that Anderson is correct about Jobs.
Still, it’s important to point out that we don’t know that at this point and we may never know.
A Wall Street source of the Macalope’s believes that how this will get resolved will probably get down to the SEC’s determination of its materiality. In the case of United Health Care, another instance where a CEO was considered personally inseperable from the performance of the company, William McGuire was forced to retire after reaping hundreds of millions of dollars in backdated options. Jobs apparently benefitted in the tens of millions, which may be insufficiently egregious in the eyes of the SEC.
The source also said the SEC – depending on the outcome of its investigation – could choose to fine Apple and/or force Jobs to return some of his shares. If the SEC determines that Jobs knew about the implications of backdating his options and still personally influenced their issue to him and sought to cover it up (the worst-case scenario), the board and the shareholders would be in an interesting position: sully the image of the company by retaining an unethical CEO or force Jobs to resign and watch the value of their stock tumble.
Yeesh.
Apple will, regardless, be required to calculate the differential between the options at the backdated prices and what they should have been issued at and take it as an expense in a future quarter, reducing its profit.
If the Macalope’s source is correct, Jobs will squeak through this on materiality. Other than those who invested in the company during the term of Jobs’ option grants but have since liquidated their holdings, this seems to be the best option for shareholders, customers and, of course, Apple’s executive corps.
Addendum: Commenter “anon” at Anderson’s blog says:
Fact: stock options can be granted at *any* strike price.
Fact: backdating is legal.
Fact: options backdating has no more bearing on shareholders than does giving him a $40m jet or paying him a $1 salary.
Fact: no one has gone to jail over this.
Yes. Yes. No. Yes.
If you give an executive a $40 million jet, you expense the lease or the depreciation on that jet and it hits the books over the period of its service. Not so with a backdated option grant. The true cost of the grant is hidden from shareholders, causing them to believe the company is in a better position than it really is and causing them to overvalue the stock in their portfolio.
ADDENDUM: See the Macalope’s response to MJN’s response to this post here.
Disclaimer: the Macalope holds an insignificant number of Apple shares. This post was edited slightly to put the attribution to Graef Crystal in the right spot and then edited again as MacJournals News is actually written by an editorial staff rather than just Matt Deatherage.
Woz says Apple will need to make it right.
Woz believes (tip o’ the old antlers to MacSurfer) Apple will need to “correct for what they’ve done.”
It’s really only interesting from a symbolic standpoint, and the Guardian piece he’s quoted in proffers several misconceptions.
By picking artificially low prices, some employees were able to buy undervalued stock at the expense of other investors and sell it at a huge profit.
The Macalope has not been a fan of backdating as a means of executive compensation because he believes it’s the wrong vehicle for the job. If a company is looking to hand a bunch of cash to an executive (and that’s effectively what backdating is – you’re handing the difference between the stock price then and the stock price now times the number of shares to the executive), well, that’s what a bonus is for.
But the fact of the matter is that if it wasn’t against a company’s bylaws and it was executed and reported properly, backdating was not illegal. Where the Guardian gets it wrong is that it’s not the picking of a particular date (and a particular price) that causes an expense to other shareholders, it’s the failure to report it.
Two weeks ago an internal investigation into the affair said Mr Jobs had known about a series of issues, but had not acted to stop the abuses.
Uh, yes, and it also said that Jobs was not aware they were “abuses.”
Bad day at the Apple Store prompts an overreaction.
Dave Rosenberg has a bad day at the Apple Store and decides the solution is to burn Apple to the ground.
If Apple wants to be an iPod company, they should at least give their business users a fair chance at being successful by licensing the OS to another PC maker.
Apple really needs to do something about this customer service problem because it’s apparently driving people insane.
UPDATE: The Macalope had started a longer post about the subject of Apple’s customer service but the Masked Blogger pretty much already wrote it.
Damn these hooves!