A Sharp Dip, then Recovery, for Apple

Investors were spookedbut only brieflyby an online report detailing possible falsified documents and Steve Jobs' decision to hire his own attorney

Officials at Apple Computer (AAPL) may have falsified documents to make more money on option grants, according to a report by a legal publication, but shares of the iPod maker rebounded Dec. 27 after investors looked beyond that news. The story by The Recorder, a California legal publication, posted on Law.com, quoted "people familiar with Apple's situation" as saying that federal prosecutors are examining company documents related to how options were handled, and whether those papers were falsified. The article also said Apple CEO Steve Jobs has retained a personal attorney to deal with the matter, raising questions about his own future at the company he helped establish.

Apple shares tumbled as much as 6% to $76.77 in early trading Dec. 27 on the Nasdaq before recovering through the session to finish at $81.52, up a penny. Apple shares have gained 13% over the past year. Stock option accounting scandals have clouded hundreds of companies in recent months and led to the ousting of CEOs.

Apple had already warned the market in October that it would have to restate its results to correct problematic stock option accounting. But the company had also said that Jobs didn't understand the accounting implications involved (see BusinessWeek.com, 10/5/06, "Apple Comes Clean on Options"). Former CFO Fred Anderson resigned in October from his current position on Apple's board. And Apple's general counsel Nancy Heinen left last spring for undisclosed reasons.

Now The Recorder, citing anonymous sources, says federal prosecutors are looking at stock option administration documents that were apparently falsified by company officials to make the option grants more profitable for the executives receiving them. Quinn Emanuel Urquhart Oliver & Hedges's three month investigation, which ended in October, had uncovered the documents, The Recorder says.

Apple didn't provide further detail about the report Dec. 27. "We're providing all details regarding the investigation to the SEC and we're not commenting beyond that," Apple spokesman Steve Dowling said.

Standard & Poor's Equity Research analysts Richard Stice and Clyde Montevirgen reiterated a buy recommendation on the stock (S&P, like BusinessWeek.com, is owned by The McGraw-Hill Companies). "Although the stock option investigations may lead to financial restatements, additional legal costs, and management distraction, we see positive near-term catalysts aiding stock performance," the analysts said in a research note. They kept a $110 12-month target price on Apple's stock.

Faking documents is, of course, more serious than making an honest mistake in your accounting. "If there's some sort of criminal or unethical conduct by executives, we've seen a lot of boards terminating executives in those situations," said Patrick McGurn, a special counsel at Institutional Shareholder Services, when he was speaking about stock option grant investigations in general some weeks ago.

Companies that have lost their CEOs amid stock option accounting scandals in recent months include the health insurer UnitedHealth Group (UNH) and the information technology services company Affiliated Computer Services' (ACS). In the latter case, for example, ACS' chairman Darwin Deason had authorized CEO Mark A. King and CFO Warren D. Edwards to do the paperwork for granting options. King, Edwards and the former CEO Jeffrey A. Rich had "used hindsight to select favorable grant dates," ACS said in November, to explain why it ousted its CEO and CFO that month.

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