Is Apple and/or Steve Jobs Committing Securities Fraud?

January 20, 2011

Steve Jobs is probably the best known active Chief Executive Officer in America. He is Apple Inc.’s public face, a celebrity of sorts and is widely known as one of the creative forces of a large, popular company with over 920 million shares outstanding. Earlier this week Jobs announced that he would be taking his second health related absence in two years. The first absence lasted from January 2009 until June of 2009 in connection with a liver transplant. This leave of absence is indefinite and for an unknown medical cause. The question is, does Apple and/or Jobs have a duty to disclose his prognosis or other health information to investors?

This question actually sets up like a law school exam. I can see it now “a CEO/co-founder of a large public company who is known as the Company’s driving force takes a leave of absence for undisclosed medical reasons. Is this actionable?”

The first time he took a leave of absence, the SEC investigated whether it should sue him for fraud.  Nothing came of that investigation, and as the link to the Wall Street Journal opines, this probably doesn’t rise to the level of something the SEC should investigate.  But as a private investor, stockholders should look at this more closely.  Specifically, Rule 10b-5 (promulgated under s10b of the Securities-Exchange Act states:

It shall be unlawful for any person, directly or indirectly, by the use of any means or instrumentality of interstate commerce, or of the mails or of any facility of any national securities exchange,

  1. To employ any device, scheme, or artifice to defraud,
  2. To make any untrue statement of a material fact or to omit to state a material fact necessary in order to make the statements made, in the light of the circumstances under which they were made, not misleading, or
  3. To engage in any act, practice, or course of business which operates or would operate as a fraud or deceit upon any person, in connection with the purchase or sale of any security.

Ok.  A lot of words there.  For these purposes though, only part of #2 applies: the “to omit to state a material fact necessary in order to make the statements made . . .  not misleading.”*

This language begs this question “Does the specific medical information omitted from  Jobs’ announcement make it misleading?”

Obviously, we are not asking Mr. Jobs’ doctors to give us a full rundown (which, actually, may mislead investors too), but I think investors need to know a few things:
A. Why did Jobs’ doctors give him advice to take leave?

B. Does this involve a specific condition, a host of conditions?

C. As of right now, what is Mr. Jobs’ prognosis?

D. Is Mr. Jobs expected to go back to work at Apple, if so, when?

E. What is the succession plan at Apple?
That’s all.  Answering these five questions would both fairly protect Mr. Jobs’ privacy, but also inform stockholders to the best of Apple’s knowledge.  Surely, some stockholders believe Mr. Jobs’ continuing at Apple is vital.  Many may not.  But, Apple should answer these questions.

*Whether a securities fraud claim here is actionable based on other elements of 10b-5 is a different story, this is not legal advice, check the disclaimer.

**As a human being and Apple consumer, this blog wishes Mr. Jobs a speedy and painless recovery from whatever medical problems he is having.


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