We study the Securities and Exchange Commission's (SEC) enforcement decisions in the context of the highly salient back-dating scandal.
We find that (1) the SEC shifted its mix of investigations significantly toward backdating and away from other accounting issues; (2) event studies of stock market reactions to the initial disclosure of backdating investigations shows that those reactions declined over our sample period; (3) later backdating investigations are less likely to target individuals and be accompanied by a parallel criminal investigation; (4) later investigations were more likely to be terminated or produce no monetary penalties; and (5) the magnitude of the option backdating accounting errors diminished over time relative to other accounting errors that drew SEC scrutiny.
The practice is not necessarily illegal, but it can violate securities laws and accounting rules when it is not disclosed to investors.
Jobs' options were also subsequently canceled when the fraud was brought to light and resulted in no financial gain to the oh-so-neglected CEO.Steve Dowling, a spokesman for Apple, declined to comment on Jobs's conversations with Anderson.Dowling emphasized that the SEC did not "file any action against Apple or any of its current employees." Government authorities praised Apple for coming forward with the backdating problems last year and for sharing information with investigators.Last year, Apple restated its financial reports from 1997 to 2002 by million to cover options-related charges.The SEC did not file charges against Wendy Howell, who reported to Heinen in Apple's legal department and who completed paperwork on an option award for Jobs in 2001.ESOs are usually granted at-the-money, i.e., the exercise price of the options is set to equal the market price of the underlying stock on the grant date.Because the option value is higher if the exercise price is lower, executives prefer to be granted options when the stock price is at its lowest.Jobs has always maintained he was unaware of the accounting fraud involved with improper backdating of his options, and no government legal action was taken against the CEO and Apple.But the resulting investigation saw Apple's former financial chief Fred Anderson and ex-general counsel Nancy Heinen forced to settle with the SEC for a few million dollars apiece without admitting wrongdoing.The SEC charges are the first in the months-long Apple investigation.Jobs was interviewed by the SEC and federal prosecutors in San Francisco, but no charges have been filed against him.