Former Broadcom CEO &CFO Indicted
Former Broadcom CEO &CFO Indicted In Massive Stock-Option Backdating Case
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Dr. Henry T. Nicholas III, a co-founder and former chief executive officer of Broadcom, and William Ruehle, the former chief financial officer of the Irvine-based technology company, have been named in an indictment unsealed today that charges them with engaging in a stock-option backdating scheme that forced Broadcom to write-down $2.2 billion in profits.
A second indictment returned yesterday by a federal grand jury alleges that Nicholas regularly maintained a supply of ecstasy, cocaine, methamphetamine and other controlled substances for use and distribution. Among other things, the narcotics indictment accuses Nicholas of using ecstasy to spike the drinks of industry executives and employees of Broadcom customers.
Nicholas, 48, of Newport Coast, and Ruehle, 66, of Carlsbad, are expected to appear before a United States Magistrate Judge this afternoon. The backdating indictment and the narcotics indictment naming Nicholas were unsealed this morning after Nicholas surrendered to special agents with the Federal Bureau of Investigation.
Nicholas, who in addition to being CEO was the co-chairman of the board of directors of Broadcom, and Ruehle were named in a 21-count indictment that alleges they and others engaged in a scheme from 1999 to 2005 to fraudulently backdate millions of stock option grants, fail to record stock-based compensation expenses, and falsify documents to further the fraud. As a result of the scheme, Broadcom restated its financial results in January 2007 and reported more than $2.2 billion in additional compensation expenses.
“Nicholas and Ruehle were involved in a wide-ranging fraud that resulted in the largest financial restatement related to options backdating in the United States,” said United States Attorney Thomas P. O’Brien. “It is critical to maintain the transparency of our financial markets, something that these defendants allegedly attempted to manipulate through the scheme, which created a false picture of Broadcom’s finances.”
Salvador Hernandez, Assistant Director in Charge of the FBI in Los Angeles, stated: "The defendants named in this indictment are accused of abdicating their responsibilities and ignoring their obligation to Broadcom stockholders and employees. The defendants are accused of deliberately manipulating their company’s public filings, and by their failure to remain accountable, contributed to a degree of mistrust in the marketplace."
The indictment alleges that the fraudulent backdating of options by Nicholas and Ruehle was done to permit them to reward Broadcom employees, including Ruehle, with favorably priced options while avoiding the reporting of stock-based compensation expenses, which would have reduced Broadcom’s earnings, making its stock less attractive to investors. The indictment alleges that Nicholas, Ruehle and others at Broadcom selected grant dates for options retroactively to coincide with low points in Broadcom’s stock price. According to the indictment, Nicholas then concealed the backdating by signing false documents that stated the option grants had been approved “as of” the retroactively selected dates. Documents filed with the SEC through 2005 allegedly contained false and misleading disclosures regarding Broadcom’s option granting practices.
Previously, Nancy Tullos, the former executive vice president of Human Resources at Broadcom, pleaded guilty to obstruction of justice charges and agreed to cooperate in the case (see: http://www.usdoj.gov/usao/cac/pressroom/pr2007/151.html).
The second indictment unsealed this morning charges Nicholas alone with violations of federal narcotics laws. According to the indictment, over a nine-year period, Nicholas maintained drug-involved premises, specifically homes in Laguna Hills and Newport Coast, a warehouse in Laguna Niguel and a condominium in Las Vegas. The indictment alleges that Nicholas obtained and distributed ecstasy (also known as MDMA), cocaine, and methamphetamine at these premises.
The indictment alleges that Nicholas used ecstasy to spike drinks at parties, and supplied prostitutes and escorts he had hired with controlled substances. In one incident of drug distribution alleged in the indictment, Nicholas and others smoked extensive amounts of marijuana during a flight on a private plane between Orange County and Las Vegas, causing marijuana smoke to enter the cockpit and requiring the pilot to put on an oxygen mask.
The four charges in the narcotics indictment carry a statutory maximum penalty of 20 years in federal prison.
The 65-page indictment in the stock-option backdating case charges Nicholas and Ruehle with conspiracy, securities fraud, false certification of financial reports, false statements in reports filed with the SEC, lying to accountants, falsification of corporate books and records, and honest services mail and wire fraud. The combined charges result in a maximum possible sentence of 340 years for Nicholas and 370 years for Ruehle, although the defendants would almost certainly receive sentences significantly lower than that maximum.
An indictment contains allegations that a defendant has committed a crime. Every defendant is presumed innocent until and unless proven guilty beyond a reasonable doubt.
This case is a result of an ongoing investigation by the Federal Bureau of Investigation. The Securities and Exchange Commission provided assistance. Last month, the SEC filed a civil action against Nicholas, Ruehle and two current Broadcom employees (see: http://www.sec.gov/news/press/2008/2008-87.htm).
The options backdating case is being prosecuted by Assistant United States Attorney Robb C. Adkins, chief of the Santa Ana branch office, and Assistant United States Attorney Andrew Stolper. The narcotics case is being prosecuted by Assistant United States Attorney Kenneth B. Julian.
Release No. 08-078