I don't know, but I'm sure the argument is that the initial transaction can't be examined any more, and the subsequent transactions were all perfectly valid.

In my opinion, the entire IRA should be considered tainted and have taxes owed on all gains since 1999.

There could also be the argument that this constitutes tax fraud (depending on whether or not the $0.001 price was significantly under the market price that investors were offered at the same time), which as far as I know means the statute of limitations doesn't apply.

The whole point of a roth IRA is that taxes are paid on the assets before they are added and the investment becomes exempt from capital gains. I'm guessing the law applies to the act of adding the options rather than exercising them, so if he paid income taxes on them and the statue of limitations have passed he is in the clear.