Sordid allegations add to billionaire’s woes

Riding the high-tech wave of the 1990s, Henry T. Nicholas III became one of the nation’s richest people, a brash and innovative billionaire who gave millions to charity and made hundreds of his employees wealthy with stock options.

A decade later, the 47-year-old faces a federal investigation and accusations from a former employee that threaten to tarnish his image as one of the tech industry’s leading entrepreneurs and one of Orange County’s most generous philanthropists.

Federal authorities are probing Nicholas’ role in the manipulation of stock option grants at Broadcom Corp., the Irvine company he co-founded and led until 2003. The inquiry follows an internal company review that found Nicholas bore “significant responsibility” for the so-called backdating of option grants.

In conducting their probe, federal investigators have taken note of a civil suit filed in Los Angeles County Superior Court by Kenji Kato, who worked for Nicholas as an administrative assistant for nearly seven years beginning in 1999.

In court filings, Kato alleged that Nicholas required him to oversee supplies of cocaine and other drugs, pay prostitutes from a “petty cash” fund and conceal his boss’ “extracurricular activities,” including his alleged drug use, from his wife and others.

Nicholas’ lawyer called the allegations “crazy” and contended the civil suit was a $9-million extortion scheme. Los Angeles County sheriff’s detectives investigated the extortion allegation and the case was under review by the district attorney, officials said.

Federal prosecutors, meanwhile, were examining the issues in the civil case to determine whether they were relevant to the options case, according to two people with knowledge of the probe who spoke on condition of anonymity because it was an active investigation.

Federal agents this week served subpoenas on several of Nicholas’ employees, but not the billionaire himself, according to another person with knowledge of the matter who spoke on condition of anonymity.

The Kato case adds another layer to Nicholas’ legal tribulations, which include a divorce case with allegations of drug use against him by his estranged wife, Stacey Nicholas.

Henry Nicholas has denied those allegations, and also denied the claims in Kato’s suit.

“These absurd allegations seem to be intended to disrupt the principal focus of my work, post-retirement, which would be in criminal justice and medical research,” he said in a statement to The Times.

Nicholas met with The Times at his office in Aliso Viejo on Thursday and again at his $19.5-million home in Newport Coast on Friday, accompanied both times by lawyers and a public relations advisor.

Nicholas said he had been counseled not to discuss the stock options probe or the allegations in the civil suit. But he did say that Kato sank into drug abuse while working for him at Level 7, a music and media company.

“We don’t have drug testing,” Nicholas said Friday. “We just set the bar so high you have to be sober to meet it. That was too high, unfortunately, for Kenji.”

In an interview, Kato attorney Joseph Kar acknowledged that his client had used hard drugs, but said Nicholas introduced him to the practice.

“Before he met Nick, I think the most he had ever done was to smoke marijuana,” Kar said.

Kato, 35, was a Pepperdine University graduate student in law and business when Nicholas hired him in 1999. The son of former Oxnard Mayor Tsujio Kato, he met Nicholas through an event-planning business operated by his brother, Dean Kato, according to records and interviews.

“We would entertain him and his guests, by arranging lavish events, dinners, concerts, parties fit for only billionaires,” Kenji Kato said in a court filing.

In his lawsuit, Kato alleged that Nicholas and his companies owed him $150,000 in unpaid wages on his $100-an-hour contract -- and that they had later breached an agreement to settle his claims for $3 million.

In subsequent court filings, Kato also alleged that Nicholas secretly spiked the drinks of business associates with drugs, ordered aides to fill balloons with laughing gas to entertain party guests and left drug paraphernalia strewn about a second Newport Coast house owned by Nicholas where Level 7 had a recording studio.

Nicholas also was said by Kato to sometimes stay up for days on end.

“At times, when I was required to stay at Nick’s home ... he would wake me up and make me drink and do drugs with him, because that was one of his favorite things to do,” Kato said in court papers. His case is pending.

In his statement, Nicholas noted that “during the period of alleged drug use, I received numerous awards for my work in criminal justice from district attorneys and various police organizations.”

“As for my supposed abnormal ‘sleep habits,’ the longest time I recall staying awake in the last 10 years was doing several all-nighters side by side with our current attorney general, Jerry Brown, to defeat Proposition 66,” Nicholas said in the statement, referring to the 2004 initiative that would have amended the state’s “three strikes” law.

In addition to being Nicholas’ assistant, Kato also worked for Level 7, which has worked with bands including Linkin Park. Bands occasionally recorded and partied at the home where Level 7 had its studio.

It was there that much of the alleged drug abuse occurred, according to Kato and four other former employees who signed sworn statements about their experiences.

“On regular occasions ... I was ordered to fill-up up to 20 balloons of nitrous oxide and deliver them to Dr. Nicholas; or, when I was required to clean up after Dr. Nicholas I frequently found remnants of usage of drugs, such as straws and plates, residue of cocaine, nitrous oxide balloons and alcohol,” Gerald Wada, a staffer for four months in 2006, said in court papers.

Nicholas disputed the allegations. He said he helped Chester Bennington, the singer for Linkin Park, kick an addiction to alcohol and prescription drugs, which Bennington confirmed Friday. “When you wake up and have a Jack Daniel’s for breakfast, it’s a pretty bad sign,” Bennington said.

Denise Boudreau, who is described in Kato’s declaration as a purveyor of drugs to Nicholas, called the accusation “ridiculous.”

“It was so over the top it was funny,” said Boudreau, who works for Level 7. “I thought Kenji was losing it.”

Boudreau said Kato was resentful when Nicholas and others running Level 7 discovered that Kato had botched many assignments at the record company and expelled him from Nicholas’ “inner circle.”

Boudreau said she occasionally saw drugs used at the recording studio, but only by musicians and that Nicholas was never present.

On behalf of Nicholas, attorney Steven A. Silverstein has sued Kato in Orange County Superior Court, saying that Kato is bound by confidentiality agreements that bar him from disclosing information about Nicholas and his businesses. That case is still pending.

Although court records included a draft copy of a settlement agreement with Kato for $3 million, Silverstein said that was the product of negotiations he conducted as part of a sting operation directed by sheriff’s detectives.

“There was never, ever, ever any intent to ever pay a penny, not one penny, for the extortionate demands,” Silverstein said

Court records show that at one point Silverstein wore a sheriff’s “wire” to secretly record a settlement meeting with Kato and three of his lawyers, some of whom threatened to go public with Kato’s allegations.

“They unambiguously said, ‘If you pay us $9 million we will make certain that no one ever knows about this information,’ ” Silverstein said.

Kar denied any attempt at extortion and said he did not expect to be charged with wrongdoing.

Nicholas founded Broadcom in 1991 with Henry Samueli, his former engineering professor at UCLA, who now owns the Anaheim Ducks hockey team and remains chairman of the Irvine computer chip maker.

In a filing with the Securities and Exchange Commission, Broadcom exonerated Samueli from backdating stock options but found “substantial evidence that Dr. Nicholas was at times involved with the selection of grant dates after the fact.”

Nicholas’ criminal attorney, John W. Spiegel, acknowledged that some stock option grants should have been accounted for differently, but said the company’s investigation showed Nicholas “did not knowingly engage in selecting grant dates after the fact.”

Nicholas stepped down from Broadcom in January 2003, but his family trust still owns nearly 30% of its voting shares.

kim.christensen@latimes.com

scott.reckard@latimes.com

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(BEGIN TEXT OF INFOBOX)

Henry T. Nicholas III

Age: 47

Education: Attended U.S. Air Force Academy. BA, electrical engineering, UCLA, 1981. MS, electrical engineering, UCLA, 1985; PhD, electrical engineering, UCLA, 1997.

Career highlights

1981-88: Worked at TRW in

electrical engineering and research.

1988-91: Managed integrated circuits team at PairGain Technologies.

1991: Co-founded Broadcom Corp. with Henry Samueli.

2003: Steps down as Broadcom CEO.

Selected philanthropy

$10 million to St. Margaret’s Episcopal School, Orange County; $4.1 million to UC Irvine-related groups; $3.5 million to Orange County Performing Arts Center.

Sources: Times research, Who’s Who in America