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Judge Rules 'No Harm, No Foul' in Apple Backdating Suit

By Fred J. Aun MacNewsWorld ECT News Network
Nov 16, 2007 11:34 AM PT

The backdating of stock options given to executives at Apple did not harm the company's stockholders, said a federal judge in dismissing a lawsuit that made the claim.

Judge Rules 'No Harm, No Foul' in Apple Backdating Suit

The complaint, filed by the New York City Employees' Retirement System, asserted the backdating of stock options granted to Apple executives, including CEO Steve Jobs, was illegal and resulted in stock dilution. However, as reported by Bloomberg, U.S. District Judge Jeremy Fogel in San Jose, Calif., dismissed the case this week.

His decision was reportedly based on the fact that the plaintiffs couldn't show how the backdating injured the shareholders especially since Apple's stock price has skyrocketed this year.

You're Damaged How?

Apple has confirmed the backdating of more than 6,000 stock-option grants issued between 1997 and 2002. Apple launched an internal investigation and determined there was no misconduct on the part of Jobs, said Bloomberg.

The backdating practice resulted in the improper issuance of more than 200 million shares, the New York City Employees' Retirement System said, but Fogel ruled the investors could not link the practice to any damages.

The plaintiffs are free to file another lawsuit that would allege the backdating was damaging to Apple as a company, noted the judge, according to Bloomberg.

The U.S. Securities and Exchange Commission is taking that approach in an action against Apple's former main lawyer, Nancy Heinen. She was sued by the SEC April and accused of backdating options to Jobs and other officers.

Tough to Prove

Attorney Jay Eisenhofer, who represented the retirement system, did not immediately return a message. A message left with Apple was also not immediately returned.

It is often tricky for plaintiffs to prove cases involving allegations of options backdating, said University of Illinois College of Law Associate Professor Christine Hurt.

"What the plaintiffs had to show is that they were damaged by the backdating," Hurt told MacNewsWorld. "And the only way can show they were damaged is if they can show a drop in share price. Since that didn't happen, their case was dismissed."

Even if Apple's stock did decline, the plaintiffs would need to convince the court the backdating, or public revelation of the practice, played a part in the drop, she noted.

"You see it in every securities lawsuit," said Hurt. "Even if there was some kind of false statement or non-disclosure, if it happens during a good economic environment and the stock went up anyway, the courts say there's no loss there."

Speculation Not Permitted

Fogel's ruling was on the mark, said John Jenkins, an Oklahoma City lawyer who practices in venture capital and commercial transactions. "The short version is that the judge got this one right because there doesn't appear to be an adequate allegation of damages by the plaintiffs, according to media reports," Jenkins told MacNewsWorld.

While some might suggest Apple's stock would have done even better had the scandal not surfaced, Jenkins said the law doesn't work that way.

Courts generally do not allow for "recovery of speculative damages" by asserting the stock could have risen even more if an impropriety never occurred, he said.

Fueling the Fire

Although lawsuits based on backdating claims are tough to win, Hurt said they make good fodder for media coverage.

"Steve Jobs had some backdated stock options and so did numerous other people at Apple," she said. "It's something that sounds very bad to the general public. The media make it sound like it's very sneaky and fraudulent, but it's hard to see how it hurts shareholders and exactly what law it violates.

"So far the only law that it could violate is just the disclosure law, but it's a topic that gets a lot of play in the news. There's a certain popular sentiment that executive compensation is too high already -- and stock options give executives windfalls -- so backdating falls into that area of outrage," added Hurt.

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