2016 options backdating scandal


12-Mar-2015 01:59

Still, given that (a) backdating helps make earnings look better than they are; and (b) Jobs is a huge shareholder of Apple (10.12 million shares, as of last April), how could he not benefit from this behavior? Jobs recommended some backdating dates for other employees.

But Apple makes clear that Jobs was directly involved in some instances of backdating.

The investigation "found that CEO Steve Jobs was aware or recommended the selection of some favorable grant dates." The committee hastens to add that Jobs "did not receive or financially benefit from these grants or appreciate the accounting implications." In other words, he didn't recommend backdating his own option grants.

After accounting for forfeitures, Apple was forced to recognize stock-based compensation expense of 5 million on a pretax basis that it hadn't done so previously.

Apple has essentially blamed former chief financial officer Fred Anderson and former general counsel and board secretary Nancy Heinen, both of whom are no longer with the company.

However, the court pointed out that the condition precedent under the option agreement was that Sutardja had to be employed by Marvell Semiconductor at the scheduled vesting dates to obtain the right to exercise the option.

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Executive Compensation Committee of Marvell’s Board of Directors determined stock option awards to senior executive officers, which included Sutardja.

This committee was composed solely of independent directors, and neither of the plaintiffs was a member.

The court disagreed, noting that within a few months of 409A’s enactment, the Internal Revenue Service (IRS) issued Notice 2005-1, which offered transitional guidance regarding the types of arrangements that are covered by Section 409A, and a definition of “deferral of compensation.”The notice advises that if a stock option is granted with a per-share exercise price that is less than the fair market value per share of the underlying stock on the date of grant, then the option will be treated as a deferral of compensation and fall under the parameters of Section 409A.

Sutardja also argued that even if the option grant was discounted, Section 409A still would not apply because he did not have a “legally binding right” to compensation until exercise, and thus no compensation was deferred to a later year.

The court found this is a necessary factual predicate to tax liability under Internal Revenue Code (IRC) Section 409A, and remanded the case to trial to determine whether the option was indeed discounted. Sehat Sutardja and his wife, Weili Dai, argued that even if the option had been granted at a discount, Section 409A would not apply, as there was no actual compensation creating a taxable event until exercised the vested portions and sold the shares.

Court of Federal Claims concluded that a genuine issue of material fact exists, namely, whether the stock option was discounted at the time it was granted.