Apple sued in widening stock option probe

Dot.com scandal claims more scalps

By OUT-LAW.COM, 6th July 2006

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Apple is being sued over its awarding of stock options. Two separate suits have been started by shareholders which make claims against current and former officers of Apple, the company announced.

The California computer maker has been caught up in a widening Silicon Valley controversy over the awarding of stock options during the dot.com boom. Some firms have already admitted awarding options at lower than market values in order to maximise their worth to employees.

Apple is the biggest name to be involved in the growing scandal. The company announced last week that it had uncovered irregularities in the awarding of some of the options awarded between 1997 and 2001, including those to co-founder and chief executive Steve Jobs.

The two lawsuits are believed to come from investors in the company and have been filed in the Northern District of California and the Superior Court for Santa Clara County.

"Last week, Apple proactively announced that it had discovered irregularities in the issuance of certain stock option grants and is conducting an independent investigation into the matter," Apple said in a statement. "The company is currently evaluating its response to the lawsuits."

More than 50 quoted companies are being investigated by the US Justice Department and financial regulator the Securities and Exchange Commission in allegations of manipulation of stock options.

Stock options operate by making shares available to an employee at a certain guaranteed price, even in the future. If the value of shares rises, the amount by which they rise is profit for the owner of options.

Discounted options would make the award more valuable for the employee because the potential profit was larger. Shareholders are likely to object to the practice because the firm must pay the price of that award by releasing equity in the company at lower than market prices.

The practice is legal when properly approved by the company's board and when shareholders are informed. Shareholders have grounds for dispute when proper procedure has not been followed.

The scandals could eventually lead to Silicon Valley companies restating their financial results, and could have knock on effects on auditors who failed to stop the practice. Already, the San Jose Mercury News has reported that semiconductor maker Micrel is suing its auditor Deloitte & Touche over its award of discounted options.

OUT-LAW.COM is part of international law firm Pinsent Masons.

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