Probe of Broadcom options may scrutinize company founders
As federal investigators ramp up their examination of stock option practices at Broadcom Corp., they are likely to put a spotlight on Henry T. Nicholas III and Henry Samueli, the billionaire founders of the Irvine chip maker, legal experts say.
Broadcom disclosed last month that the Securities and Exchange Commission had elevated its inquiry to a formal investigation, an action that gives the agency the power to subpoena documents and testimony. The U.S. attorney’s office, which could pursue criminal prosecutions, also is reviewing documents related to Broadcom’s stock options, the company has said.
Nicholas and Samueli, who rank among Southern California’s leading philanthropists, served as a two-member committee that administered most of the questionable stock option grants from 1998 through early 2003, regulatory filings show.
That period is now at the center of the federal investigations, and it’s almost certain that authorities will want to question both men, said Jan Handzlik, a former federal prosecutor who is in private practice at Howrey Simon Arnold & White.
“Among the key people you would have to interview would be the members of the options committee,” Handzlik said.
Neither Samueli nor Nicholas was among those who received stock options improperly, boosting their value to recipients, Broadcom said in a Dec. 18 statement on its internal investigation of the case, which was conducted by an outside law firm.
Broadcom said it found no wrongdoing on the part of Samueli, the company chairman, saying he “reasonably relied upon management and professionals regarding the correct option accounting treatment and grant approval process.”
Those “actively responsible for the selection of [the] option grant dates” at issue, the company said, had left the company for unrelated reasons or as a result of the company’s options investigation.
The company’s statement was silent on Nicholas, who left Broadcom in January 2003 but remains a major shareholder. Executives declined to comment beyond their public statements to the SEC.
By exonerating Samueli and not Nicholas, Broadcom could be seen as making “an implicit statement” that it believes Nicholas might share blame for the problems, said John C. Coffee, a securities law professor at Columbia University.
“You’ve got two people on that committee. If you clear one and not the other, it’s a negative pregnant. You’re saying that we’re not exonerating the other,” Coffee said.
Nicholas’ attorney, Gregory Weingart of Munger, Tolles & Olson, declined to comment. Weingart is the former head fraud prosecutor for the U.S. attorney’s office in Los Angeles.
Samueli’s attorney, Gordon Greenberg of McDermott Will & Emery, said it was reasonable to expect that the government will want to question the duo about the option grants. He declined to comment further.
Broadcom has linked only one former employee to the scandal by name: William J. Ruehle, the former chief financial officer. In September, the company said Ruehle was retiring early “as a result of Broadcom’s previously announced equity award review.”
Last month, Broadcom canceled stock options it had granted to Ruehle worth $32.8 million but credited him the same amount as an offset against possible judgments in lawsuits accusing him of violating his duties as a Broadcom officer. Ruehle’s attorney, Robert Feldman of Wilson Sonsini Goodrich & Rosati, declined to comment.
Stock options are rights to buy shares at a set price in the future. Broadcom, which makes microchips used in cable modems and other communications technology, is among nearly 200 companies that have disclosed internal or federal investigations into whether executives improperly looked back to pick grant dates when the stock price was low, thus making the options more valuable.
The probes have led to at least $7.9 billion in earnings restatements and charges to reflect costs that should have been recorded. Broadcom has said it will reduce its past earnings by more than $1.5 billion, the largest amount among the companies involved.
Coffee said the SEC’s declaration of a formal investigation, which requires approval of the five-member commission, indicated that the Broadcom case was serious and possibly one in which the agency needed a subpoena to get access to crucial documents.
In addition to seeking to interview the founders and others involved in the options grants, Coffee said, federal investigators will be looking for any falsification of related documents.
Thom Mrozek, a spokesman for the U.S. attorney’s office in Los Angeles, declined to comment, as did SEC officials.
Broadcom became a public company in 1998 and gained fame for lavishly rewarding employees with stock options, which generated fortunes during the stock boom of the late 1990s. Nicholas and Samueli emerged as prominent philanthropists and joined elite social circles.
Samueli, owner of the Anaheim Ducks hockey franchise, has his name on the UCLA and UC Irvine engineering schools and a new theater at the Orange County Performing Arts Center.
Nicholas, also a backer of education and technology projects, has donated $10 million to his children’s private school in San Juan Capistrano and helped bankroll the successful effort to avert an overhaul of California’s three-strikes law.
The rewards of success have included enviable estates for Samueli and Nicholas. Samueli and his wife, Susan, live on the Corona del Mar oceanfront, where their Country French-style garden overlooks surf crashing on rocky outcrops and a private beach.
Before their relationship soured, Nicholas and his wife, Stacey, enjoyed a 15,000-square-foot mansion on a Nellie Gail Ranch hilltop in Laguna Hills, with $1 million in computerized controls and a web of secret doors and passages built in.
Broadcom said the improper options grants ended May 19, 2003, after it made changes in its procedures and accounting. By then, Nicholas had left the company in an effort to save his marriage, and the options committee included Samueli and two outside directors.
Divorce-court records show that the attempt has been unsuccessful, with Nicholas and his wife, a former Broadcom engineer, trading accusations of erratic behavior and betrayals as they prepare for a custody hearing next month for their three children, ages 7, 9 and 13.
In recent court filings, each has sought to portray the other as a user of illegal drugs, although both claim to have passed a series of drug tests. Nicholas has moved to a gated development high in the hills of Newport Coast, but his wife continues to live in the brick Laguna Hills mansion.
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