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Investigator in Apple Probe Had Conflicts

Posted on: Monday, 8 January 2007, 06:00 CST

By Greg Farrell

One of the directors in charge of Apple's internal investigation into backdated stock options ran a computer reseller that accounted for about $600 million worth of Apple sales from 2000 to 2003.

That financial relationship, even though it no longer exists, should have disqualified director Jerome York from the assignment, say two corporate governance experts.

York, an Apple director for the past 10 years who chairs the board's audit and finance committee, was one of three board members on a committee that oversaw last year's probe into the company's improperly awarded options grants.

In January 2000, York led an investor group that paid more than $700 million to buy Micro Warehouse, a distributor of Macintosh computers and related products. York became chairman and CEO.

Over the next three years, according to Apple's filings with the Securities and Exchange Commission, Apple drew about 3% of its annual net sales from Micro Warehouse. York sold the company's assets to CDW in September 2003 for $22 million.

York's role

In addition to the history of his business relationship with Apple, York faced another conflict in overseeing the special probe: He sat on Apple's compensation committee during part of the time when Apple now says options were backdated. Apple said York recused himself from that part of the probe.

As head of the compensation committee, York had approved some of the grants that were investigated.

Still, two governance experts expressed dismay that Apple would allow York, a former chief financial officer of IBM and Chrysler, to serve on the panel.

"You either have an independent investigation or you don't," says Lynn Turner, director of research at Glass Lewis. "York was a conflicted director."

"This is not a good board, and they have not given us any reasons to feel confident," says Nell Minow, editor at The Corporate Library. Just because York no longer has a financial relationship with Apple doesn't erase all the ties that existed, she says.

"You can't unscramble that egg and suddenly become independent," says Minow. "This shows a failure to understand the core fundamentals of appearance and reality."

York did not return messages left at his home last week, and Apple declined to comment on the matter.

In a statement issued Dec. 29, York and Al Gore, the former U.S. vice president who joined Apple's board in 2003, described Apple's investigation into backdating as "exhaustive" and said the board had "complete confidence" in CEO Steve Jobs and his management team.

Apple's explanation

Apple said in an SEC filing that Jobs "was aware or recommended the selection of some favorable grant dates," but "he did not receive or financially benefit from these grants or appreciate the accounting implications."

The investigation, which the company voluntarily disclosed more than six months ago, was conducted by the law firm Quinn Emanuel Urquhart Oliver & Hedges, under the direction of Gore, York and a third outside director, Google CEO Eric Schmidt.

Apple is among about 200 companies that have admitted to or are being investigated for giving employees favorably priced options by backdating awards from the approval date to dates when the stock's market price was lower. That may violate SEC and tax rules if companies don't properly disclose and account for below-market priced options.

According to the Dec. 29 SEC filing, the investigation focused on 42,000 stock-option grants made on 259 dates from 1996 to 2003. Of those grants, 6,428 awarded on 42 dates were incorrectly dated.

Apple spokesman Steve Dowling said he did not know if the law firm interviewed Jobs or York or whether the 40-plus witnesses questioned made any statements under oath. He said the findings were given voluntarily to the SEC and the U.S. Attorney's office in San Francisco, which are looking into the matter. (c) Copyright 2005 USA TODAY, a division of Gannett Co. Inc.

Source: USA TODAY

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