Jobs unlikely to face SEC options suit

LOS ANGELES (Reuters) - Steve Jobs is not likely to face a government lawsuit over stock options backdating despite legal actions against a growing number of his former colleagues at Apple Inc AAPL.O and Pixar Animation Studios.

The two companies are among more than 200 swept up in government probes into whether they gave stock options to employees with dates carefully chosen to ensure maximum profit, a process that is illegal if not properly accounted for.

Jobs appears to have a strong case. As CEO, he may not have known about the legal implications of backdating carried out by subordinates, lawyers say. Internal audits have cleared him, and federal regulators want ironclad cases, rather than a battle against the business icon responsible for the iPod.

But two advisers to Jobs were targeted last month, and two others previously had been accused.

In addition, the U.S. Securities and Exchange Commission sued Broadcom Communications Corp Chairman Henry Samueli this month alleging backdating fraud, despite a company-commissioned audit that cleared him.


“Until the SEC tells you it’s over, it isn’t over,” said Charles Elson, director of the Center for Corporate Governance at the University of Delaware. Pointing to the Broadcom case, Elson said the SEC generally considers internal corporate audits “interesting but not relevant.”

Apple found widespread backdating without the required corporate accounting.

Options become valuable when a company’s stock price rises above a level set in the option. Backdated options typically are set at a low stock price in order to make them immediately valuable. That is legal -- but only if a company takes a charge for the value of the granted options.

The SEC has cleared Apple the company, but it sued former Apple Chief Financial Officer Fred Anderson and ex-General Counsel Nancy Heinen last year and said in April it may sue former Pixar CFO Ann Mather for backdating-related fraud. Larry Sonsini, a Pixar director whose law firm acted as the company’s outside legal counsel, faces similar accusations in a shareholder lawsuit filed in April.

Sonsini, who reportedly worked closely with Jobs on executive compensation at Pixar, has not been named in a government lawsuit, while non-board members Anderson, Heinen and Mather, who had no direct authority over compensation issues, have denied wrongdoing.


Jobs’ stature may give the government pause.

“You cannot discount the fact that Steve Jobs is an immensely well-known and well-respected icon of American business,” said Anthony Sabino, a white collar defender and law and business professor at St. John’s University in New York.

“The government is very interested in the public opinion of the ... people who sit in the jury box,” Sabino said. “If I was a prosecutor for (the Department of) Justice I would think about that.”

Despite a recent flurry of activity against relatively high-level executives, federal regulators are choosing cases carefully, looking for slam-dunks.

“We said, ‘Let’s look for people where it has been more than negligence.’ Do we need to sue hundreds of executives for being negligent?” said Marc Fagel, director of the SEC’s San Francisco bureau, said in an interview.

Fagel, who declined to discuss Jobs or any other case, said the government must believe and be able to prove that an executive knew about backdating -- and the accounting rules being broken -- before prosecuting.

“We have to bring cases we think we will win in court,” Fagel said.


Disney and Apple internal audits concluded that Jobs did nothing wrong, and some lawyers see that as the best indication that he is not likely to be charged.

“The SEC relies very heavily on the company’s own internal processes and if they have confidence in those processes they are less likely to proceed,” said Nell Minow, editor of The Corporate Library and an investor rights advocate.

Apple spokesman Steve Dowling pointed to the SEC’s 2007 statement that it would not bring an enforcement action against Apple “based on its swift, extensive and extraordinary cooperation.”

“The SEC investigation of Pixar’s options granting practices has resulted in no proceedings against Steve nor any reason to believe he will be named in the future,” Dowling added.

Backdating cases typically come down to the question of whether an executive knew and disregarded the accounting rules that make it illegal to give valuable, backdated options without taking a charge.

Brocade Communications Systems Inc BRCD.O Chief Executive Gregory Reyes was convicted of criminal charges and hit with an SEC lawsuit over backdating, while Broadcom's Samueli faces SEC action and potential criminal charges.

But unlike Jobs, who obtained board approval for options grants he proposed, both Reyes and Samueli directly awarded the majority of the backdated options. The government’s cases against Reyes turned on witnesses who testified that he knew accounting rules on backdating and intentionally flouted them.

Samueli has denied wrongdoing.

Also, the impact of backdating at Jobs’ companies was smaller. While Broadcom took more than $2 billion in charges to account for the backdated options Apple restated its earnings by $105 million, before taxes.

Even if a CEO presides over widespread backdating, he would be liable for securities fraud “only if he realizes there was no (accounting) charge,” said Phillip Stern, a former SEC attorney and white collar defender now at Neal Gerber Eisenberg in Chicago.

“In a large company, the financials are very complex and the CEO is not going through line by line to make sure everything is correct,” Stern said. “It is not something that would be readily apparent. If the board says everything is OK he has every reason to believe that is fine.”

Reporting by Gina Keating, editing by Richard Chang