Apple Executives Reach $14M Settlement In Shareholder Lawsuit
Several of Apple Inc.’s current and former executives and directors, including CEO Steve Jobs, CFO Peter Oppenheimer and former CFO Fred Anderson, have agreed to settle a lawsuit that claimed the company was harmed by their role in Apple’s mishandling of stock option grants.
The settlement aims to repair damage that shareholders, who sued on behalf of Apple and not themselves, say the company suffered due to the tampering of stock options.
According to court documents filed on Monday, U.S. District Judge Jeremy Fogel in San Jose, CA, granted preliminary approval of the $14 million settlement, which executives agreed to repay within 30 days of the date it is finalized.
The structure of the lawsuit means that insurers representing Apple’s officers and directors will pay the company $14 million.
However, the company is obligated to pay $8.5 million in plaintiffs’ attorneys’ fees and $350,000 in expenses, according to the filing. The board will also be required to adopt reforms related to the granting of stock options.
“Derivative lawsuits”, in which shareholders sue executives or board members over claims that their actions harmed the company, have become a popular instrument in stock options lawsuits. Such cases are unique because any settlement amount is ultimately returned to the company.
However, unlike conventional shareholder lawsuits requiring proof that investors were harmed, the accounting problems that result from options-backdating discoveries often do little damage to a company’s stock. This is due in part to the fact that many investors don’t incorporate options expenses in their assessment of a company’s profitability.
In the Apple case, the company was considered a “nominal defendant” because it had to defend the executives being accused of malfeasance.
Espen Eckbo, the founding director of the Lindauer Center for Corporate Governance at the Tuck School of Business at Dartmouth College, told the Associated Press that a derivative suit can sometimes “force changes that otherwise might not have happened inside the firm.”
However, he said he didn’t believe that was the case with Apple’s case.
The settlement concludes a series of state and federal derivative cases against the company related to its 2006 disclosure of accounting problems with some of its stock option awards.
The company assumed an $84 million charge after admitting it had backdated 6,428 grants between 1997 and 2002, retroactively setting the stock option’s exercise price to a low point in its value and increasing the realized profits once the options were sold. One such grant included an award of 7.5 million options to Jobs, which he later exchanged for millions of Apple shares.
This lawsuit claimed the company’s directors and officers committed fraud by backdating options grants. The defendants included Jobs, Chief Financial Officer Peter Oppenheimer, former Chief Financial Officer Fred Anderson, former General Counsel Nancy Heinen, Chief Operating Officer Timothy Cook, Senior Vice President Ronald Johnson, former executives Avadis Tevanian, Mitchell Mandich and Jonathan Rubinstein, and board members William Campbell, Arthur Levinson, Millard Drexler, and Jerome York.
According to court documents, all agreed to the settlement, and a final settlement hearing set for Oct. 31.
Backdating is not against the law provided companies properly record the expenses, something Apple didn’t do. The shareholders had asked the court to order the backdated options and associated proceeds returned to the company.
The SEC and the Justice Department have also reviewed the company’s options practices, but both investigations were closed last month upon reaching a settlement with Apple’s former general counsel Nancy Heinen, who had been charged with altering records to conceal the backdating practices.
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