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Backdated Stock Options: How Deal for Apple Chief Turned Sour

An explanation of a payment practice that has brought attention to the company formerly known as Apple Computer and many others. Transcript of radio broadcast:

This is the VOA Special English Economics Report.

Apple Computer had a big week. Steve Jobs, the chief executive officer, announced the company would now just be called Apple. And, at its MacWorld conference, he also presented the iPhone. It combines a wireless phone, music and video player, and Internet communications device in one handheld product.

The next day, Cisco Systems brought a civil case. That company owns trademark rights to the name iPhone. Apple was negotiating for permission to use it. Apple called the legal action "silly." It said there were already several companies using that name.

Recently, Apple has had to deal with another issue: backdated stock options. A stock option is an agreement to trade a stock by a set date. Companies use options as a form of pay, often for their top people.

Imagine you work for the XYZ Company. You are given an option to buy one hundred shares of its stock at the current price, ten dollars a share; the option is good for one year.

A year later, XYZ stock has risen to twenty dollars. You use the option to buy the shares at ten dollars. Now you can sell them for twenty -- for a profit of one thousand dollars.

But what if the company backdated the option? Remember, XYZ stock was ten dollars when the option was created. But a month earlier, it was six dollars. Using that point as the starting date means more profit. Instead of buying at ten dollars, you can buy at six and sell at twenty.

In August of two thousand one, the Apple board of directors approved more than seven million shares in stock options for Steve Jobs. The options were created that December, but with an October date. That added twenty million dollars to their value, because the stock price was three dollars less.

Steve Jobs never exercised the options; he received five million shares instead. But Apple had to restate its earnings to correct its options accounting. Last month the company restated its financial results for four years. Apple reduced its results by eighty-four million dollars.

In general, backdating options is not illegal but companies can get in trouble if they violate financial reporting rules. Options are taxed differently from normal pay. They can reduce taxes for companies and individuals.

Since two thousand two, backdating has been more difficult under the Sarbanes-Oxley law. Last fall, a Securities and Exchange Commission official said more than one hundred companies were under investigation.

And that's the VOA Special English Economics Report. I'm Mario Ritter.