April 24 (Bloomberg) -- Ex-Apple Inc. finance chief Fred Anderson will pay $3.5 million to settle U.S. claims over backdated stock options approved by Chief Executive Officer Steven Jobs, a person familiar with the case said, making Anderson the highest profile finance head ensnared in the government's options probe.

Anderson, 62, Apple's chief financial officer from 1996 to 2004, will also pay a $150,000 fine to settle the Securities and Exchange Commission allegations that he filed false financial reports and had inadequate accounting controls at the Cupertino, California-based company, the person said. The grants, to Jobs' executive team, were approved by the CEO and Apple's board in February 2001, and backdated to Jan. 17, boosting their value, the person said.

The settlement involving a former officer of Apple, maker of Macintosh computers and the iPod music player, escalates the federal backdating probe. More than 200 companies have disclosed internal or federal investigations into how options were awarded. Because of their role in preparing financial reports and ensuring compliance with accounting rules, CFOs are in the line of fire.

``They are the people who are responsible for minding the store and following the rules,'' said Jim Johnston, founder of Johnston Co., which provides finance advice and CFO services to start-up companies. ``To the extent that it is a reporting issue about expensing correctly, that is very much CFO territory. The CFO has to own all of those things.''

Settlement

Anderson's settlement, to be filed as early as today in federal court in San Jose, is the government's first case in an investigation of Apple's stock options practices. Jerome Roth, Anderson's attorney, didn't return a message left after hours seeking comment on the settlement.

Lawyers for Apple's former General Counsel Nancy Heinen said she is likely to be sued this week for allegedly backdating an Oct. 19, 2001, stock option grant to Jobs for 7.5 million shares, and the earlier grant to Jobs' executive team members.

Heinen, 50, resigned in May 2006 without explanation, two months before Apple disclosed its probe into backdating.

The SEC settlement doesn't involve the options grant to Jobs, the person said. Anderson, a director at EBay Inc. and Move Inc., didn't admit or deny any wrongdoing and isn't barred under the settlement from serving as a director or officer, according to the person.

Anderson, now a managing partner at Menlo Park, California- based Elevation Partners LP, a private equity firm he co-founded in 2004, has been under scrutiny since October by regulators looking into options backdating at Apple, the person said. The backdating occurred while Anderson was CFO.

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Apple fell 27 cents to $93.24 in Nasdaq Stock Market composite trading.

Apple said in December that Jobs recommended some favorable dates on options other than his own. The company didn't specify which grants he chose the dates for. Apple said it recorded $84 million in charges to correct accounting for the backdated grants.

Apple said Dec. 29 that 6,428 stock options issued between 1997 and 2002 were backdated. That included one grant to Jobs marked as approved at a special board meeting that never occurred. Apple found ``no misconduct'' by the CEO.

The U.S. Attorney's Office in San Francisco has said it is investigating options practices at the company.

Apple said it provided results of its internal probe, headed by board member and former U.S. Vice President Al Gore, to federal prosecutors as well as to the SEC.

Anderson's Options

Stock options allow holders to buy shares at a later date, usually at the trading price on the day they were granted. Through backdating, companies grant options on days with lower stock prices. That gives recipients a built-in profit. Unless disclosed and recorded as an expense, the practice hides costs from shareholders and regulators.

In December, Apple said the actions of two unnamed officials involved in accounting, reporting and recording of stock options grants raised ``serious concerns.'' One of those officials was Anderson, the person said. Regulatory filings show Anderson earned at least $10 million by exercising stock grants with favorable dates. Apple hasn't said if Anderson was involved in dating options.

Steve Dowling, an Apple spokesman, and Marc Fagel, associate district administrator for the SEC in San Francisco, declined to comment.

In 2004 Anderson retired as Apple's CFO and was named by Jobs to Apple's board. Anderson stepped down from the board in October.

Reliance

``He was CFO, so it means you can't simply rely on the representations of your subordinates,'' said William Portanova, a former federal prosecutor in private practice in Sacramento, California.

Anderson didn't play any day-to-day role in the reporting or accounting of stock options at Apple, and wasn't involved in any ``knowing manipulation of the process,'' said Roth, Anderson's lawyer, in a statement when Anderson stepped down as a director in October. He declined further comment April 19.

The SEC's lawsuit and settlement with Anderson involves options awarded to Anderson, Heinen and four other members of Jobs' executive team dated Jan. 17 to purchase 4.8 million common shares, adjusted for stock splits, the person said. Anderson was awarded 1 million shares, according to SEC filings.

Under the terms of the options, Anderson, Heinen and other executives had the right to buy Apple shares for the next 10 years at $8.41 each, the stock's closing price on Jan. 17. Anderson made at least $10 million exercising the 2001 grants three years later after he stepped down from Apple's board. He wasn't a member of Apple's board when they were approved in 2001.

Difference

The $3.5 million settlement represents the difference between the profit Anderson made exercising the grant based on the improper date and the profit he would have made had the options carried the correct date, plus interest, the person said.

The SEC's lawsuit against Anderson, which will be filed simultaneously with the settlement in San Jose federal court, says Anderson broke securities laws by failing to ensure there were adequate controls over accounting at Apple and allowing the company to file reports to regulators that contained false or misleading information, the person said.

The scrutiny he faces is a twist for Anderson, a southern California native, who is known among Apple watchers as the calm, no-nonsense executive who helped pull Apple out of financial trouble a decade ago. He survived a management shakeup after Jobs returned as CEO in 1997, said Mike Kwatinetz, general partner at San Francisco-based Azure Capital Partners and a former technology analyst at Credit Suisse First Boston.

$400 Million in Cash

When Anderson joined Apple in 1996 the company had $400 million in cash to cover $400 million in loans coming due, according to Jim Carlton's book ``Apple: The Inside Story of Intrigue, Egomania and Business Blunders.''

A former Air Force logistics planner, Anderson reduced inventory of unsold Macintosh computers, convinced suppliers to extend payment deadlines for components and persuaded Apple's Japanese lenders to extend loan terms, the book said. Within a few months, Apple had $1.8 billion in cash.

``He straightened out all their operations,'' said Kwatinetz.

Anderson's reputation for working well with others helped land him the job at Apple, said Bernard Goldstein, a former Apple director who recruited the CFO from Automatic Data Processing Inc., the world's biggest payroll manager. In 1996 Apple CEO Gil Amelio was looking for someone with more than just financial smarts, Goldstein said.

`Get Along'

``He had the ability to get along with the board and more senior management in the company,'' said Goldstein in a telephone interview.

Jobs engineered the ouster of Amelio in July 1997 and then installed his own team, removing most of the board within weeks.

Months earlier, Anderson had championed Jobs's campaign against makers of clones of Macintosh computers, Apple's biggest money maker, pushing them to pay higher royalty fees, Carlton's book said. He became one of the few top executives to survive Jobs's shakeup, said Heidi Roizen, managing director at Mobius Venture Capital, who worked with Anderson when she was Apple's vice president of developer relations.

``He may be one of one who survived the transition,'' said Roizen in a telephone interview. ``Fred led the initiatives that provided the company with financial breathing room.''

When Anderson retired on June 1, 2004, Jobs called him ``one of my closest partners.'' He was named to Apple's board seven days later. ``Though it is currently out of vogue to add insiders to boards, Fred is the exception to the rule,'' Jobs said in a statement at the time.

Recruited

Venture capitalist Roger McNamee, who knew Anderson from his analyst days covering Apple, soon recruited Anderson to help found Elevation Partners, the buyout firm that McNamee formed with U2 lead singer Bono.

``He had been involved in fixing a branded consumer electronics business that was truly broken,'' said McNamee. ``If you're in private equity, you want that.''

Anderson was raised 12 miles southeast of Los Angeles in Whittier, California. His father was a sales manager at Kraft Foods Inc. and other food companies. His mother was a homemaker.

He graduated from Whittier College and joined the Air Force for a three-year stint in 1967 during the Vietnam War. He became a captain and was stationed in New Jersey, where he helped plan airlift missions sending supplies and troops to Vietnam.

After earning a masters degree in business administration from the University of California at Los Angeles, Anderson spent five years at the Los Angeles office of accounting firm Coopers & Lybrand. He joined MAI Systems Corp., a Lake Forest, California-based software company now owned by Softbrands Inc., as CFO in 1978. He stayed at MAI for 13 years, later becoming president and chief operating officer.

Failed Bid

Once a minicomputer maker, MAI racked up losses trying to transform itself into a computer systems integrator and reseller, and suffered after a failed bid in 1988 to acquire Prime Computer Inc. By 1991, MAI had lost about $150 million, fired several hundred employees and piled up debt. Anderson was replaced the following year.

Bennett Lebow, former MAI chairman, blamed the company's problems on changing times.

``The technology was changing from minicomputers to PCs,'' said Lebow, executive chairman of Miami-based Vector Group Ltd., owner of cigarette maker Liggett Group.

Anderson then joined Roseland, New Jersey-based Automatic Data Processing as CFO, leaving in 1996 when he was recruited by Apple.

Incorrect Dates

Incorrect dates were used for granting stock options at Apple beginning in 1997 and continued until January 2002, the company said in a Dec. 29 regulatory filing. Company procedures didn't ``include sufficient safeguards to prevent manipulation,'' the filing said.

Among the grants scrutinized by federal investigators are those awarded on Jan. 17, 2001, said the person familiar with the matter. Apple awarded at least six executives, including Anderson, options with that date to purchase 9.6 million common shares, adjusted for stock splits, according to SEC filings.

After markets closed on Jan. 17, Apple announced a fiscal first-quarter loss of $247 million, along with some good news. The company had trimmed its inventories and expected to return to profitability during the second quarter. Apple's shares rose 29 percent during the next nine days.

Grant Date

The grant date wasn't approved by the written consent of Apple's board or the compensation committee until after the grants were awarded, the person familiar with the matter said. Anderson made at least $10 million exercising the 2001 grants in 2004, SEC filings show.

Anderson assisted Apple with its internal review of stock options practices, begun almost a year ago, said the person familiar with the matter.

By June, Apple had ``discovered irregularities'' with the issuance of stock grants, according to a regulatory filing on June 29. Anderson canceled a planned vacation in August to Balboa Island off Newport Beach, California, and resigned from Apple's board on Oct. 4.

To contact the reporter on this story: Karen Gullo in San Francisco at kgullo@bloomberg.net.

Last Updated: April 24, 2007 16:42 EDT