Backdating an employee''s option to buy stock at a certain price tends to guarantee that the optionee will make money. It also defeats the usual purpose of granting the option -- to give the worker an extra incentive to help the company do better financially.
Apple backdated 6,500 options over a five year period (1997-2002). It later decided to reclassify the options as compensation to the option beneficiaries. And so it restated its income as $105 million less than it reported at the time.
A class of Apple shareholders sued Steve Jobs and others for issuing false proxy statements and securities fraud. The class later amended the complaint to assert only the proxy claims. The district court dismissed on the ground that the complaint failed to allege the class suffered "economic" loss. It also refused to let the shareholders revive their securities fraud claim under section 10(b) of the Securities Exchange Act of 1934.
The Ninth Circuit upheld the dismissal but reversed the denial of leave to re-raise the claim for securities fraud. Although the complaint alleged false statements in connection with Apple's solicitation of proxies from shareholders, it didn't specify any loss to the shareholders, contrary to what section 14(a) of the Securities Exchange Act of 1933 requires. Yes, the options may have diluted the shareholders' ownership of Apple stock, but that doesn't necessarily entail economic loss, the court held. New York City Employees' Retirement System v. Jobs, No. 08-16488 (9th Cir. Jan. 28, 2010).
The district court erred, though, in concluding that the plaintiffs "waived" their right to assert a section 10(b) claim by amending their complaint to omit it. Lacking any other reason to deny leave to add the claim back, the district court abused its discretion, the court said.
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