Steven Jobs and His Health Issues: The Antifraud Provisions (Part 2)

In early January, Steve Jobs announced that he had health issues but indicated that he was under treatment and would remain in office.  A bit over a week later, he issued a second letter indicating that his health problems were more complex than expected and that he was taking medical leave until the end of June.

Can these statements violate the federal securities laws?  They can but probably did not.  The applicable provision is Rule 10b-5 which requires proof of a misstatement or omission of material fact and reliance, causation, a fraudulent state of mind (scienter) and damages.  For an action by the SEC, damages and reliance are not necessary components.

There is little doubt that the health of a CEO can be material.  Materiality encompasses information that would be important to a reasonable investor in making his/her investment decision.  For health issues to be material, they must be important enough to interfere with a CEO's ability to perform his/her managerial functions.  In addition, however, the CEO must be important enough that his or her loss would be perceived by the market as threatening the success of the company.  Not all health issues fit the former and not all CEOs fit the latter. 

Jobs is important enough that serious issues about his health would be material to the market.  This is evident from the drop in share prices (reported to be somewhat around 9%, with most of it in after hours trading) when he issued the letter indicating he was taking a medical leave. 

But even if it can be material, fraud only occurs if there is a material misstatement or omission.  From the two letters, it looks like Jobs was vague but accurate.  The first letter indicated problems with his health but built in a fair amount of uncertainty.  The doctors thought they new the cause, leaving open the possibility that they might be wrong (and, perforce, the problem might be more serious).  He also all but acknowledged that if things got worst and he couldn't perform as CEO, he'd notify the board.  In other words, the release was not full of positive information that ruled out the possibility of a worsening of the condition. 

By saying that he would "continue as Apple’s CEO during my recovery," however, Jobs did make a statement that was likely subject to a duty to update.  The second letter effectively updated the statement by saying it was no longer valid.  Jobs didn't say much about the change in his health conditions (except to note that things had become complex) but he terminated reliance on the earlier statement.  As such, the duty to update was effectively terminated.  

The market may have craved more information (and good governance might have suggested that it be provided) but the antifraud provisions largely prohibits lies.  The handling of the two letters (each carefully worded, with the second just enough to cut off reliance on the first) suggests that as a matter of the securities laws, Jobs did nothing improper.