Broadcom to pay $12 million to settle SEC fraud suit

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By Kim Christensen and E. Scott Reckard

The complaint alleges that the Irvine chip maker's top officials -- namely Henry Nicholas and Henry Samueli -- backdated stock options.

Broadcom Corp. on Tuesday agreed to pay $12 million to settle allegations that its top executives backdated stock options, but the Securities and Exchange Commission complaint did little to put the matter behind the billionaire co-founders of the Irvine chip maker.

Without referring to them by name, the SEC lawsuit singled out Henry T. Nicholas III, who stepped down as chief executive in 2003, and Chairman Henry Samueli, a major Orange County philanthropist who owns the Anaheim Ducks professional hockey team.

"The backdating scheme at Broadcom was orchestrated and carried out by Broadcom's most senior executives, including its co-founder and former chief executive officer [Nicholas], its co-founder and chairman and chief technical officer [Samueli]" and others, the complaint said.

Federal prosecutors also have identified Samueli and Nicholas as "unindicted potential co-conspirators" in a criminal investigation of the backdating allegations. That investigation is continuing, and the settlement with the SEC does not preclude a separate action by the Justice Department.

Neither Samueli nor his attorney could be reached for comment Tuesday. A Broadcom spokesman said the company had agreed with the SEC that no employees would comment.

Nicholas -- who last week checked into the Betty Ford Center for an alcohol-rehabilitation program -- said through his lawyer that he did not benefit personally from the backdating.

"At all times he believed he was complying with company rules, as well as accounting and legal requirements," attorney Brad Brian said.

The settlement was the second-largest growing out of more than 200 stock option backdating cases investigated by the SEC. The largest settlement, for $28 million, was with Mountain View, Calif.-based Mercury Interactive Corp., a software company that was accused of overstating its revenue and making fraudulent loans. Mercury was acquired by Hewlett-Packard Co. in 2006.

The SEC lawsuit alleged that other former senior Broadcom employees, including the general counsel and chief financial officer, participated in the fraud.

Nancy Tullos, a former vice president of human resources, has agreed to pay $1.4 million to resolve claims against her, the SEC said last month, and has pleaded guilty to one count of obstruction of justice.

Broadcom, without admitting wrongdoing, agreed to settle the SEC lawsuit for $12 million and consented to a permanent injunction against further federal securities violations.

"We are pleased that the SEC's investigation of our historical stock option grant and accounting practices has concluded as to the company," Broadcom said in a statement. "This is a major step in the process of closing this chapter as we remain focused on the company's business today and for the future."

An option is a right to buy shares at a set price in the future, and the price is typically the closing price of the company's stock on the date the option is granted. But Broadcom and many tech companies, especially, backdated options to take advantage of lower closing prices. That increased their value to employees at the expense of shareholders.

Broadcom, which makes computer chips used in Nintendo's Wii game console and other consumer products, saw its shares rise 9% to $25.68 in extended trading Tuesday after reporting unexpectedly strong earnings. It had closed the regular session at $23.55, down 27 cents.

Filed in U.S. District Court in Santa Ana, the SEC's civil complaint contains new details of the backdating scheme, including allegations of a cover-up that involved falsifying corporate records, which is a federal crime

The illegal backdating occurred from June 1998 through June 2003 and involved as many as 88 options grants during a time of "tremendous growth," for the company, the complaint said. After Broadcom went public in April 1998, it expanded from about 300 employees to about 3,000 by 2002.

"Broadcom operated in the highly competitive high-tech market where recruiting and retaining talented employees was a top priority," the complaint noted, as was preserving cash. "As a result, Broadcom relied heavily on stock options to recruit and retain employees."

The SEC complaint does not allege that Samueli or Nicholas profited from the backdating. Many Broadcom employees made little money on stock options because the stock price already had begun a long descent by the time the options could be cashed in.

But as a result of the fraud, Broadcom restated its financial results in January 2007 and reported more than $2 billion in additional compensation expenses, the SEC said.

Defense attorney Jan Handzlik, a former federal prosecutor who now represents white-collar defendants but is not involved in the Broadcom case, said the facts in the SEC's complaint seemed more like "civil wrongdoing" than "willful criminal fraud."

"There is still no suggestion that company executives sought to enrich themselves through these practices," Handzlik said.

"Instead of alleging a willful scheme to defraud, the complaint says that the officers were 'reckless in not knowing' that their actions would 'trigger accounting consequences.' This is a far cry from the smash-and-grab behavior at a company riddled with fraud," Handzlik said.

Broadcom granted employees options to purchase 238 million shares of common stock from June 1998 through May 2003. For the 95% of the options that went to employees other than top executive officers, the options committee consisted of Nicholas and Samueli; the alleged improper dating of those options was the basis for most of the company's restatement of its earnings.

But 5% of the awards went to other corporate officers, including then-Chief Financial Officer William Ruehle and David Dull, Broadcom's general counsel at the time. Those grants should have been made by two independent directors, but instead were made by "top officers -- not the compensation committee," the SEC said.

According to the complaint, Dull directed the preparation of false board and compensation committee written consents to conceal some of these grants.

Dull's attorney, James Asperger, couldn't immediately be reached for comment. Dull has not been charged by federal prosecutors

Neither Dull nor Ruehle was identified by name in the SEC complaint.

"Should the SEC pursue an action against Bill, he will vigorously defend against the charges," said Ruehle's lawyer, Richard Marmaro. "When all of the facts are heard, it will be clear that Bill Ruehle was never on the company's board of directors or stock option committee; he never had authority or responsibility to grant stock options, or to select grant dates, and he never did so."

At Broadcom, Nicholas was known for challenging colleagues and rivals to match his work hours and hard-partying habits. His recent life has been marred by divorce proceedings, allegations of drug abuse and accusations by former contractors that he sought to build a secret "sex lair" for prostitutes beneath his former home.

Nicholas blamed the most egregious allegations on disgruntled former employees he contended were trying to wring major financial settlements out of him.

Last year, Nicholas pledged to provide $100 million to charity. Banners for an educational foundation were soon hanging from buildings he rented across the street from the federal courthouse in Santa Ana, and he pledged funds to youth sports, medical research and troops in the Middle East.

Nicholas has been "deeply distressed" by a custody battle with his estranged wife and was devastated by the recent death of his stepfather, his lawyer, Bill Hake, said last week after the billionaire checked into the Betty Ford Center for a monthlong alcohol treatment program

For all his prominence as a sports team owner, Samueli is perhaps best known as a philanthropist. His family foundation has given more than $200 million to support education, youth services, health and Jewish cultural causes.