Apple’s Practices Examined—Internally and Externally

Apple Computer Inc. announced earlier this week that it has been notified of derivative lawsuits filed in the United States District Court for the Northern District of California and the Superior Court for Santa Clara County. Both suits make claims against current and former officers and directors with respect to the company’s awarding of stock option grants, according to Apple’s website.

Even the timing of grants awarded to CEO Steve Jobs is being investigated. The company’s standpoint on that one is that Jobs’ grant was subsequently cancelled and there was no financial gain in it for him.
“Apple is a quality company, and we are proactively and transparently disclosing what we have discovered to the SEC,” said Jobs in a statement. “We are focused on resolving these issues as quickly as possible.”
Last week, Apple announced that it had discovered irregularities in the issuance of certain stock option grants between 1997 and 2001. The company is currently evaluating its response to the lawsuits. Apple said a special committee of outside directors has hired independent counsel to conduct an investigation, and the company has informed the SEC. Apple will not comment further on the matter until an independent investigation is concluded.

In recent after-hours trading Wednesday, the company’s stock was off 15 cents, or 3 percent, to $56.85.
Questions over executive stock options have sparked federal investigations of dozens of companies, many of them technology firms, according to CNNMoney.com.

“The SEC and prosecutors are investigating whether companies ‘back-dated’ stock options for some employees, or retroactively changed the date an options grant was effective, to a date that led to a bigger windfall for those who held the options. Stock options give executives and employees the right to buy shares at a certain price, and if the stock rises after the options are granted, profits can be fat.”
The practice of back-dating largely ceased in 2002, when Sarbanes-Oxley legislation took effect and made back-dating harder to do. 

In other legal matters, Bloomberg reported this week that Apple Computer Inc. and Creative Technology Ltd. said in court papers they “remain open to the possibility” of ending their litigation battles over handheld music players.

Apple and Singapore-based Creative are suing each other in California, Texas and Wisconsin. The International Trade Commission also is investigating complaints each has made accusing the other of infringing patents related to the devices.

Shares of Creative have risen 17 percent over the past five days on optimism the lawsuits may be settled, according to the Bloomberg report. In a July 3 joint court filing in Madison, Wisconsin, the companies were “open” to reaching an agreement.

“The parties will remain open to the possibility of settlement,” they wrote in the joint report to the judge. “No specific settlement discussions are planned.”
Creative has less than a 10 percent share of the U.S. market for digital music players in the U.S. and ranks behind Apple at 77 percent and Milpitas, California-based SanDisk Corp., according to The NPD Group. Apple has sold more than 50.8 million iPods since Jobs introduced the gadget in 2001.

In the Wisconsin case, Apple suggested a March trial date, while Creative suggested November 2007. That case involves some of Apple’s claims of infringement against Creative.
The California case has been put on hold until the U.S. International Trade Commission resolves a complaint that Creative filed seeking to block U.S. importation of the iPod, which is made in China.