University of Iowa professor Erik Lie is credited with the research that exposed the widespread use of backdating to boost the value of options granted to corporate executives--a scandal that is dominating the news with Macworld just a week or so away. And while Wall Street analysts raced to be first to declare Steve Jobs absolved of all blame after Apple disclosed details of its internal investigation yesterday, Lie isn't so sure.
Read on to find out why.
Surprisingly, the item that caught many experts' eye--that someone at Apple claimed one of Jobs' options grants was priced at a board meeting that never actually happened--was not of great concern to Lie.
Given the administrative history of the grant--which was first okayed in August 2001, but not finalized until December, when someone at Apple pegged the price to that mystery board meeting on October 19 of that year--backdating was certainly possible. But then, says Lie, why wouldn't Apple have priced the grant on Oct. 3, when AAPL shares then sold for a split-adjusted $7.39, rather than on Oct. 19 when the shares sold for $9.15. As such, “That’s not the thorn that’s sticking out," says Lie, who says he began analyzing Apple's options grants even before the company first admitted "irregularties" this summer. (Since then, Lie has earned consulting fees providing his analysis of Apple's options filings to investors trying to handicap how the scandal will impact AAPL shares.)
That's because Apple didn't hit the absolute optimal date, if it wanted to maximize the value of Jobs' options right out of the gate. When looking for grants that might have been backdated, he looks for instances in which options are granted just after a decline in a company's stock price and before a big run up. The tell-tale V-shape pattern suggests that a company might have managed its news flow to lower the stock so it could give the lowest possible priced options to execs or employees, so as to give them big gains (on paper, at least) by then managing the stock upward (say, by announcing a hot new product, or an improved financial outlook). Clearly, Oct. 19, 2001 was not at the bottom of that V-shaped pattern.
But there are other sharper thorns in Apple's option-granting past, from Lie's perspective. He points to a Feb 5, 1997 grant that was given at Apple's lowest share price in a forty day period. And the huge ten million share grant to Jobs on Jan. 12, 2000 was even more suspicious. Apple shares fell 22% in the nine days before that date, and were up 30% just eight days later. And Apple admitted in its filing that it first authorized the grant on Dec. 2, 1999, and then "memorialized" the granting of the options as of Jan. 12--but not until Jan. 18, when Apple shares had begun to rise. "That's the one that jumps out," Lie told me.
That's not only because of the pricing pattern, but because of the size of the grant--and who was getting it. When trying to handicap whether a company might be playing fast and loose with accounting rules, that matters, says Lie. For example, a company that managed to give some options to rank-and-file employees at suspiciously low prices on a few occasions might in fact have been lucky, or maybe the CEO was smart enough to quickly hand out options based on some unfounded negative rumors. But companies that managed to nail the very bottom of a big pricing "V" when they were giving out the biggest grants, to the highest-ranking executives, raises more eyebrows for him. The 2000 grant to Jobs "was one of the biggest options grants ever. I'm not saying it was backdated and I'm not saying they did anything illegal, but [the circumstances are] consistent with manipulation. But who knows, they might have just gotten lucky."
I then asked if he thought Jobs was getting an easier time than the dozens of other executives that have lost their jobs over the backdating scandal, simply becuase of Jobs' celebrity and iconic reputation with investors and consumers. He said no. Rather, he pointed out his belief that there are many executives that have flouted options accounting rules that have not yet even been identified. “I believe there are potentially thousands of executives who have gotten completely off the hook. Because he’s steven jobs, he’s more in the spotlight....The media has been struggling to put a face on this scandal. If anything, he’s been treated unfairly relative to other people who have been completely unscathed.”