Broadcom co-founder testifies he didn’t know backdating stock options was improper
Henry Samueli, who co-founded Broadcom Corp. in a friend’s garage and helped grow it into a leading microchip designer, took the witness stand Tuesday with an equally challenging task at hand: defending the company’s backdating of stock options to a federal jury in Orange County.
Samueli was called as a defense witness in the trial of Broadcom’s former chief financial officer, William J. Ruehle, who faces 14 counts of fraud and conspiracy related to the stock option scandal. Ruehle has pleaded not guilty.
Federal prosecutors contend that Ruehle, Samueli and company co-founder Henry T. Nicholas III backdated stock options to make them more valuable to employees, concealing $2.2 billion in compensation from the company’s shareholders.
Samueli, 55, has already pleaded guilty to a single count of lying to the Securities and Exchange Commission, and he is scheduled to be sentenced at the conclusion of Ruehle’s and Nicholas’ cases. U.S. District Judge Cormac J. Carney rejected a plea agreement in which Samueli was to pay a $12-million fine and receive no jail time.
Nicholas has pleaded not guilty, and his trial on the stock options charges is scheduled for February.
Last week, Carney cleared the way for Samueli’s testimony by ruling that nothing he said in Ruehle’s trial could be used against him. Samueli had said he would invoke his 5th Amendment protection from self-incrimination if called as a witness in Ruehle’s trial.
During five hours of testimony in Santa Ana, Samueli told jurors about how he and Nicholas launched their company in 1991, starting in Nicholas’ garage. The company now occupies a massive campus in Irvine and has more than 7,000 employees and nearly $5 billion in revenue.
Its chips are used in such devices as wireless laptop computers, cable television boxes and Apple iPhones.
Samueli said Broadcom’s success was based largely on its highly skilled employees. In order to retain its employees, the company issued them stock options, which swelled in value during the tech boom of the late 1990s.
When the company went public in 1998, more than 70% of its employees became instant millionaires. Options are rights to buy shares of a company’s stock at a specific price, usually set at the price on the date they are issued. Backdating stock options to an earlier date, when the stock price was lower, increases their value.
After securities regulators began investigating the practice earlier this decade, many companies were forced to revise their financial reports to reflect the increased option-related expenses.
In 2006, Broadcom had to restate its earnings to reflect $2.2 billion in options-related compensation costs, reducing the company’s previously reported financial results.
Prosecutors contend that Ruehle participated in a conspiracy to hide the backdated options from investors.
Ruehle’s defense attorney, Richard Marmaro, has told the jury that it was common for high-tech companies to exercise flexibility in picking option-grant dates from the 1990s until 2005, when rules about the practice were tightened. Broadcom was one of hundreds of firms that set option grant dates to make them more valuable to employees, Marmaro said. Samueli said he had no idea that there was anything improper about the practice.
“I’m an engineer,” Samueli said. “I relied on our legal team and shareholder services. If somebody used the word ‘illegal,’ in a discussion with me, yes, I would remember that.”
Ruehle played no role in the setting of stock option prices, Samueli said.
Samueli’s testimony also addressed the colorful management style of the company’s former co-chairman Nicholas, who is facing drug distribution charges in addition to the stock options allegations. He has pleaded not guilty to those allegations as well.
Nicholas was a hard-charging supervisor who often worked late and was “very hard to work for,” Samueli said.
“He himself hardly ever slept, so he didn’t think anybody else needed to sleep,” Samueli said. “I love him. But he doesn’t know what a clock is.
“There was nobody better at driving a company than Dr. Nicholas. He had laser-like focus on the success of the company.”
