SEC Charges Former Apple Attorney With Fraud

The Securities and Exchange Commission (SEC) charged former Apple Inc.  general counsel Nancy Heinen with fraud in connection with an options backdating scandal that broke last fall.

The SEC also settled charges it filed against former Apple CFO Fred Anderson, whom it accused of failing to take steps to ensure that the company’s books were correct. Anderson will pay the SEC $3.5 million in penalties without admitting or denying the allegations.

In Heinen’s case, the SEC said she participated in the “fraudulent backdating of options granted to Apple’s top officers that caused the company to underreport its expenses by nearly $40 million.”

In addition to artificially reducing a company’s expenses, backdating allows executives to exercise their options at lower-than-prevailing market prices and then sell them at unlawful profit.

Heinen is charged with violating more than 15 separate provisions of the Securities Act of 1933 and the Securities Exchange Act of 1934.

In its complaint, filed in the Northern District of California, the SEC is seeking injunctive relief, disgorgement and civil penalties, as well as an order barring Heinen from serving as an officer or director of a public company.

According to the SEC, Heinen caused Apple to backdate options on several occasions in order to reduce compensation expenses associated with the options grants, and then created fictitious minutes of a board of directors meeting “that, in fact, never occurred.”

Meanwhile, Anderson’s case with the SEC has been resolved after the former CFO resigned from Apple’s board in October 2006 after the company released the results of an independent internal investigation into options backdating.

According to Anderson’s attorney, Jerome Roth, a partner at Munger, Tolles & Olson, Anderson had discussed the option grant dates with Apple CEO Steve Jobs. Anderson was reassured by Jobs that the options were “being properly handled,” Roth said in a statement released to the press today.

Anderson served as CFO from 1996 until 2004; the review conducted by the company found 15 instances of options backdating between 1997 and 2002, which was on his watch.

According to the SEC, both Heinen and Anderson were on the receiving end of some of those stock option grants.

Apple’s internal investigation also acknowledged that there were “a few instances” where Jobs knew that favorable grant dates had been selected.

But the internal investigation exonerated Jobs of wrongdoing, saying he did not receive or otherwise benefit from these grants and was unaware of the accounting implications.

The company has yet to restate prior earnings relating to the backdating. But in a proxy filing made earlier this month, it urged shareholders to reject a shareholder proposal that would force the board to adopt a strict options backdating policy.

The proposal, which was sponsored by the Amalgamated Bank and the Connecticut Retirement Plans and Trust Funds, called for restricting how the company awards stock options in order to avoid conflicts of interest between executives and shareholders.

“In our view, managers’ interests cannot be aligned with shareholders’ interests if managers are allowed to benefit in ways that shareholders cannot,” the proposal concluded.

Apple directors urged shareholders to vote against the proposal because it needs the “flexibility to compensate executive management with the terms that the board believes to be most appropriate for attracting and retaining top caliber talent.”

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