Mathew Ingram: Stock-option scandal takes shine off Apple's squeaky-clean image

All the personal electronics and computer companies left in the dust by Apple Computer's iPod over the past few years have probably been hoping for something to happen that might weaken Apple's iron grip on the portable music market.

But rivals such as Sony have waited in vain - until recently, that is, when Apple disclosed it was embroiled in a stock-option pricing scandal.

With dozens of other technology companies, the personal computer maker has admitted to irregularities involving its stock-option programme and has said that it would have to restate its earnings for the past several years at least, years in which it reported some of the largest profits and highest revenue growth in its history.

Last week, Apple said that it would not be able to file its quarterly report with the US Securities and Exchange Commission on time, an offence for which it could (theoretically) face delisting.

Is this enough to knock Apple off its perch atop the personal music market? Analysts say that is unlikely but the exposure has already knocked the company's share price down during the past few weeks as investors worry about the potential fallout from the "backdating" scandal.

Some companies and their senior executives are already facing securities charges related to the practice and industry watchers say they expect to see class-action lawsuits against some of those involved.

Several of the analysts who follow Apple have said they don't think the issue was enough to destabilise the company or its products.

"Apple's fundamental business remains intact and we expect seasonal factors to positively influence results for the next two quarters," Standard & Poor's equity analyst Richard Stice wrote in a recent report, calling the company a "strong buy".

An analyst for Loomis Sayles said that "the investment case for Apple is so strong that investors are not going to let the options issue get in the way of owning the stock". And Piper Jaffray analyst Gene Munster wrote in a recent research note that "this issue slightly tarnishes Apple's squeaky-clean image, but, more importantly, this does not impact Apple's underlying fundamentals".

The "backdating" issue in question involves the pricing of stock options that are awarded to senior executives. Tech companies such as Apple use stock options as a financial incentive. They are typically awarded at a low price and then become cashable at some future date, at which point the share price has usually gone up.

Backdating is the process of shifting the issue date for stock options in order to enhance the future payout, something governance critics say stacks the deck in favour of company executives.

It was a little easier to be complacent about Apple's involvement a few weeks ago, when the company said its financial restatement would be relatively minor, and that the options in question did not involve chief executive Steve Jobs.

More recently, however, Apple has said that it could affect financial periods all the way from 1997 (when Jobs rejoined the company) up to and including its most recent results, and that some of the options involved in the backdating process did go to Jobs.

That has made some investors and even some analysts nervous. Although it is still only a remote possibility, one fund manager said that Jobs' involvement raises the possibility that he could be forced to leave the company.

Since Apple's CEO and co-founder has played such a dominant role in the resurrection of the computer company and the success of its iPod line, losing him would be seen by many as a serious blow.

"It's a real probability, not a fictitious one," said the fund manager. "It's big enough that investors have to pay attention to it now."

Although delaying its 10-Q financial report puts Apple at risk of being delisted from the Nasdaq, the odds of that actually happening are low. And despite the restatement controversy, Jobs is unlikely to depart the company under a cloud.

The prospect of continued uncertainty and potential legal liability has the market worried, however, and that is not going to go away until the issue is put to rest.

The strong-willed might see Apple's recent weakness as a buying opportunity, but the prudent are likely to stay on the sidelines.