Analyst opinion: Will Steve Jobs have to leave Apple?

  • Last Month, the Mercury News ran several stories claiming that Steve Jobs was in the clear and pointing the finger at Apple’s ex-CFO Fred Anderson and ex-General Counsel Nancy Heinen as being responsible for the stock issues at the firm. They also reminded us that Apple’s own internal investigation had cleared Jobs, despite a sequence of events that looked really questionable, and analysis that suggested he was very exposed.  

    Then both these accused ex-employees went public in the same publication with the CFO outright saying both Jobs and Apple’s board were responsible, yet the company was evidently exonerated. Fred Anderson’s statements suggest Jobs is to blame. So what is happening here?    

    Playing the Mercury News

    The press is often used to create a foundation for litigation that is either anticipated or in plan.  This can be done by both sides and generally results from “leaks” to the media which argue one side of the case or the other. If it was the prosecution, in this case the federal SEC investigators or Federal Attorney’s office, the leaks would have pointed to the likely guilt of Apple’s board and its CEO.  

    In this case, the leaks spoke to the lack of any real evidence and the fact that Jobs clearly had no idea what he was doing was, in fact, illegal and provided two already fired scapegoats to focus on.   The Mercury News, which now had a scoop, went on to publish the results broadly and their coverage was picked up by others.  

    There are several reasons to do this.   The first is to contaminate the potential jury pool if there is a case.  If successful several jurors are likely to make it into the court having already been convinced that this is a witch hunt and that Jobs and Apple’s board are innocent making it much more difficult for the prosecutor to win the case. Additionally, the prosecutor, in knowing this, is much more likely to find a way to settle out rather than lose a high profile case against two very powerful and popular people, Steve Jobs and Al Gore.  

    Finally, it sets up the two scapegoats making them look dishonest and, assuming their recent statements were anticipated, makes them simply look like they are covering up their own illegal activity by accusing their betters of the crimes.  

    This doesn’t mean that Jobs and the Apple board are guilty or innocent it just how this game is sometimes played.   Realize that the goal of the Apple legal team is to win in court and, given Apple itself is an expert at using the media to move product, it shouldn’t be a surprise if they used that powerful tool to assure the outcome they wanted.

    The risk

    Here is the difficulty the defense team is up against. If you have read any of the unapproved biographies of the man because Apple went to extraordinary lengths to try to kill it), you will see that Steve Jobs, as he is presented, is largely a construct by the Apple advertising agency which did an incredible job remaking Jobs into who he appears to be.   

    Over the years, Steve has shown himself to be a micro-manager and one very focused on his own income.  Unlike Google or Microsoft where the wealth was broadly shared with employees, Steve has a history of assuring his own incredibly lucrative compensation and really not caring much what anyone else makes. Also there has been a trend to cover up his compensation, publicly talking about his $1 a year salary but leaving out the support for his multi-million dollar jet or the massive amount of options and stock he received instead of a salary.  

    This will make it hard for Apple to now argue that Steve played no role in the backdating of his own options and that there wasn’t intent to mislead the stockholders with regard to what he was making. The evidence and Steve’s own widely covered personal history would seem to suggest the opposite was true.  

    In addition, he did submit a sworn certificate on August 8, 2002 saying he had reviewed the related Proxy statement (which the Apple ex-CFO now says Steve knew to be inaccurate) and believed it to be true. That’s going to be a real problem.  
    But they can’t get rid of Steve because he may be worth $16 billion in valuation to the company right now.  

    The problem for the prosecution #1

    Steve Jobs is not only a national figure; he is supported by Al Gore who is arguably one of the most powerful people in the Democratic party, which currently controls Congress.   An attack on Gore could be seen as related more to his position on Global Warming and positioned as a political stunt to discredit him with broad ramifications in the upcoming elections. This is quite literally a political time-bomb and not one to be taken lightly. It may also be one of the primary reasons Gore is on Apple’s board in the first place (it sure isn’t because Apple is particularly green).  

    Steve Jobs is so tightly connected to Apple that many, perhaps the majority of investors, don’t believe Apple could survive without him.  If he was removed, the result could actually be more damaging to the investors than anything he did with the options.  If you recall that Apple’s stock price was dropping at the time these backdated options were issued and that they became worthless, you can suggest that while there was intent to commit a crime, the actual damage was below negligible because the options turned out to be worthless. Granted they were later exchanged for a massive amount of stock worth millions, but, as screwy as this sounds, there is nothing illegal about this. And while I doubt many knew of it, it was properly disclosed.   

    There is a lot to suggest that, given everything else that is going on, this might be something that they would just as soon walk away from and focus on other companies and executives who are less well connected and clearly did more harm to their stockholders.  

    The problem for the prosecution #2

    Unfortunately life isn’t that simple. They have settled with Apple’s CFO who is now going public with his claims on Steve Jobs’ guilt. In addition, Apple’s chief counsel is an attorney and will need to prove her allegations that she was just following orders. This is likely to be a very public trial and, because Apple is not the entity taking the action, Apple can’t settle out to make the news go away.  

    In short, the government, to walk away, needs to walk away from everyone.  If they go after someone, unless the problem really can be contained, which seems very doubtful, they have to go after everyone.   But they can go after each person in turn and build up to a case against Jobs from the testimony captured either as part of settlements or in court until, and unless, they have enough for a conviction.  

    There is also a related civil litigation in process, which could also feed the criminal cases (and visa versa), but Apple could buy their way out of this. However, the fact that there is this litigation supports an argument that the stockholders were in fact significantly damaged and this makes it more difficult for the Federal Government to exit this process.  

    Issues for Apple

    To a large extent, Steve Jobs’ invulnerability is tied closely to Apple’s continued success.   That may become problematic as the news from the trial(s) could eclipse Apple product coverage and damage sales.  Things aren’t going quite as well for Apple right now as they had been either. Leopard, its next OS, which was actually due last year, has been delayed until October,  the new Apple TV isn’t selling well, and there are a lot of doubts about the iPhone which could, as Apple’s very first phone, fall well short of customer expectations or be trumped by a competitive offering from a real phone company. The phone market today bears little resemblance to the MP3 market when the iPod was launched.  

    If Apple’s star starts to fade (given the current financials this seems unlikely near term) so will the support for Jobs - and Gore could easily come up with a number of reasons to focus more on either running for office or his global warming efforts. That would create a cascade of issues that might lead to Jobs being asked to leave and further exposing him to the possibility of future criminal or civil actions.  

    Also, if some of the old stories resurface about his abusive behavior, particularly towards women (and one of the two women charges is likely to use this argument effectively to show coercion), or his attempts to intentionally mislead investors at NeXT as pointed out in an earlier Biography “The Second Coming of Steve Jobs” a result of the trial testimony in any of the cases could alienate a lot of buyers and investors who would probably look at both Steve and Apple differently as a result.   

    What will happen?

    Hard to tell at this point, but I don’t see how the government can stop short of Jobs and Apple’s board if they are going to go after the lower level employees. Responsibility flows upwards, not downwards, and even if both were not directly involved they are legally accountable for anything that happens in the companies they manage. The laws have been strengthened significantly post Enron here and I simply do not see an easy way for the Government to walk away no matter how much they might otherwise want to.  

    However, there will be more pressure, both direct and indirect, put on US Attorney’s office to walk away than in any other similar instance I’ve followed and, this time, it could be enough. One thing would appear clear; this will probably be history in the making and the long term implications could go well beyond Apple, particularly if Al Gore is looped into the problem.  Given how many CEOs have fallen for similar things, it does suggest, so far, that Jobs is uniquely privileged.  The word “interesting” is inadequate to describe what we are likely to see next.  

    Rob Enderle is one of the last Inquiry Analysts.  Inquiry Analysts are paid to stay up to date on current events and identify trends and either explain the trends or make suggestions, tactical and strategic, on how to best take advantage of them.  Currently he provides his services to most of the major technology and media companies.