Analyst: No SEC Backdating Witch Hunt Looming

by , 11:45 AM EST, December 28th, 2006

Despite what appears to be wide-spread abuse of stock option grant backdating among fortune 500 companies, the Department of Justice and the Securities and Exchange Commission are unlikely to go on a witch hunt to prosecute offenders, according to American Technology Research analyst Shaw Wu. He also thinks that there are no SEC plans to turn Apple into a scapegoat over its option grant issues.

He commented "We do not believe it makes sense for the US government to nail Apple and Steve Jobs, one of the most respected American companies and businessmen of the past 100 years. To us, there is no question that the iPod + iTunes franchise and now Mac has helped revitalize American competitiveness in technology and consumer electronics."

If federal prosecutors have "smoking gun" evidence that Apple executives forged financial documents, that certainly isn't good news, but it also doesn't indicate with certainty that the government would pursue a case against the company.

"The bottom line is that 'falsification of documents' and 'options backdating' are serious yet closely inter-related," Mr. Wu said. "And we do not think it is likely that Apple will be used to make an example by the government."

Other companies that are tied up in similar investigations are likely to find themselves in the same position as Apple. Estimates indicate that 30 to 35 percent of the Fortune 500 companies have improperly backdated stock option grants. But prosecuting all of those companies could have a negative impact on the U.S. economy.

Mr. Wu said "Given the widespread nature, we doubt the SEC and Department of Justice will pursue a broad "witch hunt" forcing key executives to step down that would undermine the recovery of the US economy."

Instead, he expects the government is more likely to tighten enforcement on options backdating to prevent similar situations in the future. For Apple, that means once its 10-Q and 10-K financial forms are filed with the SEC, the company can start looking ahead.

Moving forward, Apple has several catalysts to keep its stock value healthy. The release of Mac OS X 10.5 is getting closer, along with the iTV. A new video capable iPod with wireless features may also be in the works, and Mr. Wu also predicts that we will see an Apple-branded cell phone in 2007.

Mr. Wu is maintaining his "Buy" rating and $99 target price for Apple. He is projecting $6.4 billion in revenue for the December quarter with 15.5 million iPods sold.

Apple stock is currently trading at $80.31, down 1.21 (1.48%).

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