Broadcom faults founder in probe
Broadcom Corp. said Henry T. Nicholas III, its co-founder and former chief executive, bore “significant responsibility” for improperly backdated stock options that led it to disclose $2.2 billion in unreported expenses Tuesday.
The Irvine computer-chip maker restated earnings to take the huge noncash charge, the largest by far of any reported by some of the nearly 200 companies entangled in the scandal over manipulating the timing of option grants to maximize gains.
The company in September warned investors to expect more than $1.5 billion in charges and possibly “substantially more.”
In a filing with the Securities and Exchange Commission, Broadcom said a five-month investigation found “substantial evidence that Dr. Nicholas was at times involved with the selection of grant dates after the fact and with subsequent allocations of grants.”
It also faulted the “tone and style of doing business he set.”
Nicholas’ attorney, John W. Spiegel, acknowledged that Nicholas’ leadership in building the company “resulted in stock-option grants that, in hindsight, should have been accounted for differently.”
But he said the internal review also found that Nicholas “did not knowingly engage in selecting grant dates after the fact and sought advice from appropriate persons regarding the process for option grants.”
Both the SEC and the U.S. attorney’s office are investigating Broadcom’s handling of stock options, which are rights to buy shares at a set price in the future.
Options are supposed to be issued and granted on the same date, but a number of companies in the late 1990s and early 2000s manipulated the timing to give recipients bigger gains when they exercised their options, then failed to disclose the practice to investors.
The Broadcom board of directors’ audit committee, which conducted the internal review, said the improper backdating occurred from 1998 to mid-2003. Since then, the committee found, the company has followed equity granting procedures that are “appropriate” and “sound.”
“This is all historic and has nothing to do with current operations,” said Rob Enderle, an analyst at Enderle Group. “It does create some concerns about corporate governance.”
Broadcom’s shares closed down 20 cents at $29.46 before the announcement. They fell an additional 26 cents after hours.
“We look forward to putting this matter behind us,” Broadcom CEO Scott A. McGregor said.
Coupled with a small tax benefit, the charges reduced income by $2.22 billion from 1998 through 2005.
“I think this was necessary [and] was pretty much expected,” said Cody G. Acree, an analyst at Stifel Nicolaus & Co.
Broadcom had not been able to file quarterly reports since May, leaving investors with limited information on its financial condition.
Nicholas and Henry Samueli, his former engineering professor at UCLA, founded Broadcom in 1991. The two assumed complementary roles: Samueli the visionary chief technical officer, Nicholas the aggressive, hands-on chief executive -- a man who once worked more than three days without sleep to complete a deal.
Nicholas became one of the more colorful figures in the technology stock boom of the late 1990s. He was proud to outwork rivals and out-party colleagues.
Like scores of young, growing tech companies, Broadcom used stock options as currency to supplement lower-than-usual salaries and keep employees from bolting to competitors.
Many cashed in early and became millionaires. But their Ferraris, Porsches and Lamborghinis were parked in the company lot into the morning hours as Nicholas challenged them to keep up with him.
After inspecting more than 6 million documents and interviewing more than 40 people, the board’s audit committee and outside lawyers found that Nicholas and others played fast and loose with stock options on 18 dates.
The company said neither Nicholas, who left the company in 2003 to save a foundering marriage, nor Samueli, who remains chairman, benefited directly from any backdated options.
Their efforts, however, made them billionaires as Broadcom’s stock soared in the years before the tech economy burst in 2001. Both have donated millions to charitable causes. Samueli owns the Anaheim Ducks professional hockey team.
The two founders, who made up the committee that granted and issued stock options, failed to keep formal records of what they were doing, making it impossible to verify “many past option grants,” the company said.
Broadcom’s audit committee excused Samueli’s conduct, saying he “reasonably relied on management and other professionals.” Acree, the analyst, noted that Samueli oversaw technology and strategy, not finance.
Neither Samueli nor his lawyer could be reached for comment.
Broadcom also blamed William J. Ruehle, who was brought in as chief financial officer to take the company public in 1998, and Nancy M. Tullos, its former human resources chief.
Ruehle, who in September retired early, was “at the center of the flawed option granting process,” the filing said. “There is substantial evidence he engaged in the selection of grant dates after the fact.”
Tullos was “heavily involved,” though there was no evidence she selected the grant dates, the company said. She was “fully aware of what was occurring, and encouraged, assisted in, and enabled it,” according to the filing.
Ruehle’s lawyer, Robert Feldman, downplayed the significance of Broadcom’s big financial correction.
“The committee found no evidence of falsification or forgery,” Feldman said. “The size of the restatement related to the volatility and number of shares, not to the nature of the conduct.”
Tullos’ lawyer, Ismail Ramsey, said her job as a human resources executive was to “process” grants of options approved by her superiors and other professionals “whom she trusted and relied on.”
He said Tullos wasn’t a lawyer or an accountant and didn’t select the favorable grant dates. “In every instance, she did what everyone thought was in the best interests of Broadcom and its employees,” Ramsey said.
A big problem was that no one could check up on anything because basic records weren’t created, the company said.
“From our initial public offering through May 2003, Broadcom’s option grant processes and procedures were not formalized or consistently followed,” the company’s revised 2005 SEC filing said.
The options committee instead met informally to determine whether option grants should be “approved and priced as of that day,” Broadcom said. The options, nearly all of which were given to employees outside of top management, were prepared after the “as of” date and signed “at a later time,” the company said.
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scott.reckard@latimes.com
