The backdating and repricing of stock options became a huge public issue last decade, almost immediately after the WorldCom and Enron scandals rocked the business world, which resulted in the passage of the Sarbanes-Oxley Act of 2002. The timing of this backdating and repricing of stock options occurred in the years that followed the Internet stock market bust in 2000 and 2001, followed closely by the events of September 11, 2001.
In responding to the questions related to this case, be sure to provide references for all sources you used. Your answers to this case study should be 5 pages in total, including cover and reference pages. The body of the paper, which must be at least 3 pages in length, should be double-spaced. Make a copy of each question below and place the questions into the body of your paper in bold-type, so that we can both see that you have addressed each one of the questions in your submission.
Questions/Requirements
Explain in detail what is meant by the backdating and repricing of stock options. Be specific.
Conduct research regarding a SEC investigation of Apple backdating its stock options and the deposition of Steve Jobs. Summarize in your own words the results of that disposition. Did anyone at Apple get into trouble with the SEC in regards to the backdating of the stock options? If so, who and why?
Comment on the ethics of backdating stock options. Summarize the best and most authoritative literature you can find on this subject. Do you believe that either the backdating or the repricing, or the combination of backdating and repricing at the same time, constitutes an act of fraud? Why or why not? Be specific. This is the most important question in the homework assignment for this week, so make sure your research and answers are well grounded, explained, and written. Cite sources.
Full Answer Section
Repricing is the practice of changing the exercise price of a stock option. This can be done to increase or decrease the exercise price. For example, if an option is granted on January 1, 2023, with an exercise price of $100 per share, and the stock price decreases to $80 per share by December 31, 2023, the company may reprice the option to an exercise price of $80 per share. This would allow the recipient of the option to exercise it at a lower price and realize a greater profit.
Question 2: Conduct research regarding a SEC investigation of Apple backdating its stock options and the deposition of Steve Jobs. Summarize in your own words the results of that disposition.
In 2006, the Securities and Exchange Commission (SEC) began an investigation into Apple's stock option granting practices. The investigation focused on a series of stock option grants that were made to Apple executives between 1997 and 2002. The SEC alleged that Apple had backdated the grant dates of these options in order to give the executives a lower exercise price.
In 2008, the SEC filed a civil lawsuit against Apple and several former Apple executives, including Steve Jobs. The SEC alleged that Apple had engaged in "securities fraud" by backdating its stock options. The SEC also alleged that Jobs had been aware of the backdating and had failed to take steps to stop it.
In 2011, Apple settled the SEC lawsuit without admitting or denying any wrongdoing. Apple agreed to pay $8 million in disgorgement and a $1 million civil penalty. The SEC also barred Jobs and several other former Apple executives from serving as officers or directors of public companies for a period of time.
In his deposition, Jobs denied that he had been aware of the backdating of stock options. However, he admitted that he had been "careless" in his oversight of the company's stock option granting practices.
The results of the SEC investigation and the deposition of Steve Jobs made it clear that Apple had engaged in a widespread practice of backdating stock options. The backdating allowed Apple executives to realize millions of dollars in profits. The backdating also had the effect of inflating Apple's earnings.
The backdating scandal tarnished Apple's reputation and led to calls for greater corporate governance reform. The scandal also highlighted the importance of executive compensation oversight.