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Group of enraged shareholders file class action for backdating practices which sunk their shares' worth

Angry investors have filed suit against Apple Inc., CEO Steve Jobs, former financial officer Fred D. Anderson, former general counsel Nancy R. Heinen, and several members of the company's board of directors on Friday.  They allege that as a result of Apple's security fraud, they experienced massive losses on the stock market.  They filed their case in U.S. District Court in San Jose, California.

The case is led by plaintiffs Martin Vogel and Kenneth Mahoney, who are seeking class action status.  They stated that the aforementioned plaintiffs and board members William V. Campbell, Millard S. Drexler, Arthur D. Levinson, and Jerome B. York filed false financial statements, concealing millions in executive perks through backdated stock grants.

Apple already acknowledged that such practices did indeed occur.  It said that there were "accounting irregularities" between 1997 and 2001, according to a 2006 report.  It acknowledged that some of the funds in question went to Jobs, but "i
t was subsequently canceled and resulted in no financial gain to the CEO." 

Apple has been subject to numerous government investigations due to its questionable accounting.

After Apple's admission in 2006, the stock price dropped 14 percent, a loss of over $7B USD to shareholders.  The shareholders filing suit hope to regain this money from Apple.

The report in question came in
December 2006.  In it, Apple said that it would be forced to rework its financial results to include an additional non-cash stock-based compensation expense of $84 million after tax [$105 million pretax], including $4 million and $7 million in fiscal years 2006 and 2005, respectively.  However, despite the ongoing irregularities, Apple said it found no irregular grants after Dec. 31, 2002.

The plaintiff's complaint weighs in at a hefty 105-pages.  It basically accuses Apple of knowing what it was doing and intentionally acting in a way that could damage shareholders.  It charges, "
The defendants knew that options were not granted on the dates that were disclosed to shareholders and falsified the company's records to create the appearance of illegality, and thus bear direct responsibility for their actions.  Here, Jobs and the Individual Defendants clearly appreciated the fraudulent nature of their conduct."

Jobs, a controversial figurehead of the tech industry, has received many "instant paper profit[s]" according to the complaint.  The first it says was $20,325,000 when, on Dec. 18, 2001, thanks to 7.5 million Apple shares in a stock option grant dated back to Oct. 19, 2001.  The second was an even bigger 10 million-share option grant in January 2000 resulting in $83,762,000 for Jobs.  The first, it says was not even recorded in Apple's books, while neither were disclosed to shareholders.

Apple would not comment formally on the allegations.

Owen Pell of 
New York law firm White & Case said the case offers up little new in the way of fraud allegations.  Most of the matters in question have already been widely reported.  The case may be a tough one for the plaintiffs, he said, as they must prove that the drop in stock price corresponded to the admission from Apple.

Loss causation is not necessarily obvious on the face of the complaint in terms of the plaintiffs adequately pleading the link between the news of Apple's income restatement and the stock drop.  Apple may be able to point readily to other news, either about the company or the market in general, that coincides with market movements," said Mr. Pell.

Mr. Pell added that Apple can elect either to put the suit on hold while pending lawsuits are resolved or more likely apply to have it dismissed.  If the plaintiffs can't offer up sufficient evidence of causation, the case is likely headed to the legal graveyard.

Gary S. Graifman, a partner in the firm of Kantrowitz, Goldhamer & Graifman, P.C. and one of the plaintiff's attorneys, argues that his clients have a very strong case.  He stated, "I think the timing of the drop in the stock and the [Apple] announcements would speak for itself and demonstrate that there is causation."

Pertinent to the case is the
April 2007 filing and simultaneous settlement of U.S. Securities and Exchange Commission charges against former Apple CFO Anderson.  According to the SEC, Mr. Anderson should have noticed Apple general counsel Heinen's fraudulent backdating activity and may have cast a blind eye to it.  Mr. Anderson settled with the SEC, "without admitting or denying the allegations in the commission's complaint," agreeing to pay a $150,000 penalty, agree to an injunction on further security law violations, and to return $3.49M USD in stock options.

Past private efforts to sue Apple for stock options violations have been largely fruitless. 
The New York City Employees Retirement System filed a similar suit, but this May U.S. District Court Jeremy Fogel said that the group could not sue Apple.  He said they couldn't prove that Apple's actions had caused the pension fund harm.  He advised them to join a separate stock-options lawsuit currently in progress.  The results of that suit also remain to be seen.

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By oab on 7/2/2008 12:00:28 PM , Rating: 0
The stock price dropped what do you do?

Then - damn, I'm SOL, I'll see if it rebounds or cut my losses.
Now - I'll just sue the company!

RE: Gee
By Cheapshot on 7/2/08, Rating: 0
RE: Gee
By FITCamaro on 7/2/2008 12:42:49 PM , Rating: 5
True. But if there was true foul play, that is not part of the risk of playing the stock market.

However I do believe that these people should only get the money THEY lost if they win.

RE: Gee
By Denigrate on 7/2/2008 12:44:59 PM , Rating: 5
Investors need to be protected from fraud. Nice to know that the huge premium charged by Apple is going directly to Jobs bank account through fraudulent Stock Options.

Investors should be able to go after a Corp if they can prove fraud.

RE: Gee
By DCstewieG on 7/2/2008 1:12:56 PM , Rating: 2
It acknowledged that some of the funds in question went to Jobs, but "it was subsequently canceled and resulted in no financial gain to the CEO."

RE: Gee
By Oregonian2 on 7/2/2008 1:29:58 PM , Rating: 1
And in any case, the dollar amounts talked about are insignificant in terms of Apple revenue and profits (and isn't real money anyway, "money" spent on stock grants and the like are only opportunity-lost sorts of money in that they COULD have been corporate money had the company sold those same shares on the open market).

So the actual value in terms of Corporate health and the business being run was of insignificant impact.

If there is somebody to sue, it'd be those who were involved in the transactions where shares traded hands at lower prices. Their psyche is what lowered the share prices, not the company's actions.

RE: Gee
By MrBlastman on 7/2/2008 1:27:05 PM , Rating: 2
I agree - but they should be compensated fairly as well.

As it is right now, they receive such a paltry sum from any settlement it is absurd, while the lawyers laugh all the way to the bank.

.10 to .20 cents a share is a pittance. Sometimes, there are "hidden fees" that are deducted from _that_ sum which reduce it even further.

RE: Gee
By oab on 7/2/2008 6:14:30 PM , Rating: 2
In that case, what is the SEC for anyway? Just let the civil courts handle it. Who needs them.

RE: Gee
By afkrotch on 7/2/2008 11:40:05 PM , Rating: 2
The problem is, that money they lost, could have been used other ways.

Let's say you got paid $7 billion and somehow tax irregularities caused you to get nothing. So you had to go through the hassle of getting your money back. 12 months later you win in court.

Should you get back $7 bil or should you get back $7 bil plus the interest you would have gain, if said money were in the bank? $7 bil at 2% compound interest over 12 months is $141 mil. As they work with stocks, that money could have been turned into a lot more than $141 mil.

I find it no different than someone who got hit by a car that is sueing for their hospital bills and loss of income cause they were injured and couldn't go to work. That money they lost could have been used to make more money.

RE: Gee
By abzillah on 7/2/2008 3:03:52 PM , Rating: 2
What are you expecting from these apple lovers? I'm not surprised.

"We don't know how to make a $500 computer that's not a piece of junk." -- Apple CEO Steve Jobs

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