Broadcom’s Henry Nicholas indicted on federal fraud charges

A federal grand jury has indicted Henry T. Nicholas III on fraud charges, according to documents unsealed today that also accuse the Orange County billionaire of supplying customers with prostitutes and drugs and slipping Ecstacy into the drinks of unwitting technology executives.

In a 21-count indictment, Nicholas and former Broadcom Corp. Chief Financial Officer William J. Ruehle were charged with backdating millions of stock options for five years to improperly reward employees of the Irvine computer chip maker Nicholas co-founded.

A second indictment naming only Nicholas accused him of maintaining homes and commercial properties in Orange County and Las Vegas for the “purpose of using and distributing controlled substances” he sometimes referred to as “party favors.”

“Defendant Nicholas spiked the drinks of others with MDMA (ecstacy) without their knowledge, including … the drinks of technology executives and representatives who worked for Broadcom’s customers,” the indictment alleged without identifying the victims.

The indictment detailed episodes in which Nicholas allegedly used and distributed illicit drugs, including cocaine and methamphetamines.

On a flight from Orange County to Las Vegas aboard a private plane, the government alleges, Nicholas used and distributed drugs, “causing marijuana smoke to enter the cockpit and requiring the pilot flying the plane to put on an oxygen mask.”

Nicholas, who stepped down as Broadcom’s chief executive in 2003, surrendered to the FBI this morning, said Pete Norell, a supervising FBI special agent in Santa Ana.

He was to make his initial appearance in U.S. District Court in Santa Ana this afternoon at a hearing at which prosecutors said they would ask that he be held without bond as a flight risk.

The first indictment detailed a conspiracy to backdate stock options to make them worth more to employees without having to report the expense to shareholders. To correct its books, Broadcom last year recorded $2.2 billion in previously unreported expenses – the biggest charge by the more than 200 firms whose options practices have come under scrutiny.

“By fraudulently backdating and repricing option grants, defendants and their co-conspirators deceived Broadcom’s shareholders, potential shareholders and auditors as to the nature and amount Broadcom truly was compensating its employees and officers,” the indictment alleged.

“Dr. Nicholas will contest these charges vigorously,” Nicholas’ lead attorney, Brendan V. Sullivan Jr. of Washington, D.C., said in a statement. “He is confident that he will be fully vindicated.”

Ruehle’s lawyer, Richard Marmaro of Los Angeles, said Ruehle “looks forward to the opportunity to clear his good name in a court of law.”

Marmaro said Ruehle relied on the advice of Broadcom’s auditors in operating the stock option program. He characterized the backdating problems as accounting glitches with no intent to defraud shareholders or mislead financial analysts.

“This is a classic case of government overreaching,” Marmaro said in a statement. “The government’s indictment unsuccessfully attempts to transform a company’s technical accounting error into criminal conduct.”

In the separate drug indictment, Nicholas is alleged to have used death threats and payoffs to conceal his “unlawful conduct.” In June 2002, he reached a $1-million “settlement agreement” with an unnamed Broadcom employee who knew about his alleged illegal drug activity, according to the indictment.

It lists three properties described in previous Times reports about Nicholas’ alleged indulgences in drugs and prostitutes:

* An equestrian estate in Laguna Hills, where Nicholas had constructed a warren of tunnels and underground rooms, including one that contractors alleged was intended to become a secret “sex lair.”

* A warehouse-office complex in nearby Laguna Niguel, which contractors said was used for the same purposes and nicknamed “The Ponderosa.”

* A Newport Coast residence where Nicholas was trying to start a record company and where rock groups frequently visited.

In a civil lawsuit seeking back wages, former Nicholas aide Kenji Kato contended that this home also was the scene of frequent use of drugs and prostitutes.

The options charges, handed up Wednesday by a federal grand jury in Santa Ana, were similar to a Securities and Exchange Commission lawsuit filed last month. The SEC suit accused Nicholas and Ruehle, along with Broadcom co-founder Henry Samueli and the company’s former general counsel, David Dull, of backdating stock options.

Samueli and Dull were not named in the indictment unsealed today, although the government could still seek to charge them later.

Samueli, a prominent philanthropist and the owner of the Anaheim Ducks hockey team, is a former engineering professor of Nicholas. The two founded Broadcom in 1991, with Nicholas serving as chief executive and Samueli as chairman and chief technology officer. They are among the best-known entrepreneurs in Southern California, having helped to shape Orange County’s modern image as a technology magnet.

Nicholas quit the company in 2003, saying he wanted to spend time trying to repair his marriage. Samueli stepped down from his roles as Broadcom officer and director when the SEC lawsuit was filed, although he remained at the company in an advisory capacity.

 scott.reckard@latimes.com

 kim.christensen@latimes.com