It is legal to grant an in-money option - there is nothing in corporate law that prevents anyone from backdating an option. So why are all these CEOs and CFOs going to jail? (Well,
if you're not Steve Jobs that is,
since he gets a free pass).
The companies are issuing Incentive Stock Options (ISOs), which means you have to pay ordinary income tax. Because they are reported as ISOs, people who receive them are not paying the right tax and companies are not reporting them on the right way. An ISO postpones tax on the option from the date of exercise to the date of sale, and gives you a good shot at capital gains treatment on the entire thing. In other words, getting an ISO instead of a NQO postpones and potentially lowers the tax.
But then, people are not going to jail for tax evasion - they are going to jail for violating securities laws.
The simple answer is that it's fraud. When you issue an in-money option, the accounting rules require at the very least that the amount is in the money is an expense cost to the company. As a result, the transaction violates disclosure and accounting requirements in securities laws.
(Maybe that's part of the reason Apple is charging for the wireless upgrade - they have enough accounting troubles as it is.)
If they wanted to do this legally, they could have by categorizing and reporting it properly, but ultimately they wanted ISO tax treatment for options that didn't otherwise qualify.