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July 05, 2006

Apple Implicated in Stock Options Scandal

Analysts are predictably defending Apple Computer (AAPL) on last week's news that the company is caught up in an options backdating scandal. Merrill Lynch did a good analysis showing that options granted very close to the annual low in the share price were only 5% of total options. None of these suspect options were granted to Steve Jobs. Excluding Jobs, a larger 15% were granted within 5% of the annual lows.

According to Apple's press release, Jobs did receive one huge grant of 20 million options in 2000 which was apparently cancelled and provided him no financial benefit. However, the New York Times noted that in 2003 when Jobs options were cancelled they were worthless. Further, the options were replaced by a stock grant worth $75 million dollars that had a three year vesting period.

10 million shares of the Jobs grant were announced on January 19th, 2000 in a press release issued by Apple. The press release said that the exercise price was about $87 as of the date of the grant which was January 12th. On January 19th, Apple already was trading at $106, giving Jobs a $190 million paper profit. The gist of the options scandal is that company's were granting options after the fact and backdating them to the lowest prices of the past year providng no risk profits to managers while diluting shareholders. It is not clear if Apple did any backdating in this case. An internal investigation will be conducted to determine if any impropreity occurred.

Analysts are focused on whether the investigation undercuts shareholder support for Steve Jobs and Tim Cook. Assuming management is left in place, analysts seem unconcerned. Apple longs are lucky that the company is something like the 50th to be implicated rather than the 1st.

Posted by Steve Birenberg at July 5, 2006 09:19 AM in AAPL