Apple Chief Benefited From Options, Records Indicate

Though Apple said Jobs may have recommended the selection of some favorable dates for options, it said he did not appreciate the accounting significance of choosing false dates. The company said its internal review found no misconduct by current members of Apple management.

Though the 2001 award to Jobs has gained the most attention, an earlier, more generous grant in 2000 is also at issue. The Apple board finalized an award of 10 million stock options to Jobs on Jan. 12, 2000, and said in its filings last month that it was correct in using Jan. 12 as the date for the options' price.

Apple stock on that date happened to be at its lowest level for a six-month period, including about 10 weeks prior, making the stock options especially lucrative. By Jan. 18, when Apple said the board transmitted its unanimous written consent to the grant, the stock price had increased nearly 20 percent.

Lucian Bebchuk, director of Harvard Law School's program in corporate governance, said Jobs falls into a category of chief executives that Bebchuk has labeled "super-lucky." These are the people who have received stock options on dates representing the lowest price of the financial quarter.

"He has some company. He is not the only one to be as fortunate," Bebchuk said. He and his fellow researchers found in a study released two months ago that about 1,000 CEO grants from 1996 to 2005 fell into this category. For most of these options, he said, the dates were more likely to have been the result of "manipulation" rather than good fortune.

Backdating stock options is not illegal. But not disclosing the practice to investors or falsifying documents to cover it up may be.

In lawsuit filed last month in federal court in Northern California, Apple shareholders alleged that company officers and directors had manipulated the price of stock options for Jobs and other executives by repeatedly selecting dates with favorable stock prices. The plaintiffs allege that by doing so, Apple officers and directors unlawfully enriched Jobs and his fellow executives and concealed the practice.

Dowling, the Apple spokesman, declined to comment on the lawsuit. Nor would he comment on how Apple selected the dates for the sets of options awarded to Jobs, saying any available details were contained in SEC filings.

Apple reported in its filings that Jobs voluntarily gave up his stock options in March 2003 and "in exchange for his cancelled options" received the 5 million shares of restricted stock. The filing said Jobs relinquished the options partly because he was concerned that the number of unexercised options at the company had grown too large for its financial health. Apple's stock price had declined sharply in previous years, making many of those with options reluctant to use them. With the exercise price higher than the market price at the time, the options were said to be "underwater," meaning that anyone who exercised such an option immediately would lose money.

But while it would be unwise to exercise options under those circumstances, the options were far from worthless. They were good for up to 10 years after they were issued, allowing time for Apple stock to rebound, as it subsequently did.

The value of stock options on a specific date can be estimated with the Black-Scholes model, a widely used technique that factors in variables such as exercise and market prices, interest rates, dividends, expiration date, and stock volatility. Based on Apple's figures, disclosed in SEC filings, the combined value of Jobs's two stock option grants when he relinquished them in March 2003 was $81.3 million.

Graef Crystal, a retired consultant who is widely recognized as an expert on executive compensation, recently conducted a separate calculation using the same approach. But instead of using Apple's estimate of the stock's expected volatility, a crucial variable, he measured its actual volatility in the market. He also used his estimate of how long executives hold options before using them, based on experience instead of Apple's projection. Crystal calculated that Jobs's options were worth $76.6 million when he gave them up.

Financial analysts said that both estimates show that the options were of generally the same value as the stock Jobs received. Crystal said this showed that the exchange of options for stock was based on "some kind of parity."

Crystal and other financial experts said Jobs appeared not only to benefit from his options in general but specifically from the favorable dates when they were issued because lower prices for the options could ultimately translate into more shares of stock when he made the exchange.

In the case of the 2001 grant, for instance, the difference between the false October date and the December date, which Apple now says was the proper one, was worth about $5 million to Jobs when he traded the options in. Had the lower value been used in calculating the amount of stock he would get in return, he would have received 630,000 fewer shares. By the time he could sell them three years later, these shares would have been worth more than $40 million because of the soaring price of Apple stock.

Staff researcher Richard Drezen contributed to this report.