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crazy4wdw
02-11-2007, 04:53 PM
Disney asks: Did Jobs profit at its shareholders' expense?
He sold Pixar to the entertainment giant for $7.4 billion, which some say was inflated.

Joseph Menn Los Angeles Times |
Posted February 11, 2007

Could Steve Jobs have benefited from the backdating of stock options without actually receiving the securities in question?

Legal and business experts say he might have done just that in the $7.4 billion sale last year of Pixar Animation Studios Inc. to the Walt Disney Co.

Jobs, who was Pixar's chairman and chief executive, owned half of its shares and therefore reaped a big reward from the sale of the animation studio.

But Disney shareholders might have overpaid for the company behind such hits as Cars and Toy Story.

That could have happened if Pixar's earnings were inflated by an understatement of compensation costs related to option grants years before the Disney deal, according to these experts.

The case is forcing Disney to decide whether Jobs enriched himself at the expense of its shareholders.

Jobs, CEO of Apple Inc., is Disney's biggest shareholder as a result of the Pixar sale, as well as a Disney director and key adviser on technology to Chief Executive Bob Iger.

In addition to Jobs' role in granting options at Pixar, federal authorities are probing option practices at Apple, which has acknowledged making two grants to him improperly dated.

Disney disclosed in November that it had received inquiries from federal regulators about possible option backdating at Pixar. The Burbank-based entertainment giant has launched a probe of the issue.

A Disney spokesman didn't respond to questions Friday about the investigation. Apple would not comment.

More than 180 companies are under investigation by the Securities and Exchange Commission for questionable option-backdating practices. More than a dozen CEOs have lost their jobs, including Bruce Karatz, former head of Los Angeles-based builder KB Home.

A couple of executives have been hit with criminal charges related to the scandal.

Options are rights to buy stock at a set price within a certain time period. The price of stock to be bought using an option is generally the stock's market price on the day the option is granted by the company's board.

In their probes, regulators want to know whether option grant dates were changed after the fact to make them coincide with a stock's lowest price in a particular period. Doing so could give executives instant paper gains on their options. It also could inflate a company's earnings by understating employee-compensation costs.

Backdating isn't necessarily illegal, but failing to disclose the practice in a timely manner is.

Pixar is an unusual case because the company no longer exists. That would make government or private lawsuits more complicated. No such claims appear to have been filed.

Any cases would be weakened by a jump in Disney shares since the Pixar deal, in part because of Disney's aggressive Internet strategy. That would make it difficult for Pixar shareholders who held their Disney stock to prove they had been damaged by an overstatement of earnings.

Another complication is the widely held belief that Disney overpaid for Pixar to shore up its own weak animation unit and that the price was not based on Pixar's reported earnings.

Pixar asserted in its sale documents to Disney that the option dates were accurate.

As of late last month, Disney's investigators hadn't questioned several Pixar directors who voted to approve the option grants, according to people familiar with the inquiry and who asked not to be named because of the confidential nature of the probe.

If they did talk to the former Pixar directors, they might not have learned much. The board didn't discuss the dates of the options and took minutes to approve the grants, according to two people knowledgeable of the board discussions. Instead, the directors relied on dates that appear to have been picked by Pixar's management. Top executives such as Jobs might have relied on financial and legal executives to choose those dates.

The bottom line at Pixar, said attorney Claudia Allen, who advises corporate boards on options matters, is that "the income was overstated," through such option grants to the likes of Ed Catmull, the former Pixar chief technology officer and now president of feature animation at Disney, and John Lasseter, Pixar vice president for creative development, who is chief creative officer at Disney's animation and theme-park-design units.