Broadcom founders accused of fraud

Times Staff Writers

Seeking the best and brightest during the tech boom, Broadcom Corp. founders Henry T. Nicholas III and Henry Samueli tossed out millions of stock options to attract and reward favored employees, whose Porsches and Lamborghinis gleamed in the parking lot as they worked late into the night.

On Wednesday, federal regulators accused the Orange County billionaires of manipulating the options illegally for five years. Hours later, Samueli stepped down as chairman and chief technical officer of the Irvine chip maker.

“I could not in good conscience allow today’s unfortunate turn of events to become a distraction to the company I co-founded,” Samueli, a major philanthropist and owner of the Anaheim Ducks NHL team, said in a statement.

Nicholas, who quit as chief executive in May 2003, could not be reached, and his lawyer declined to comment. In mid-April, Nicholas checked into the Betty Ford Center for an alcohol treatment program.


In a lawsuit filed Wednesday, the Securities and Exchange Commission accused Samueli and Nicholas of systematically backdating 232 million options to make them more valuable, then hiding the fact from other shareholders. The suit, filed in federal court in Santa Ana, said the fraud involved as many as 88 options grants.

The SEC named as defendants two other key players in Broadcom’s ascent to the giddy height of success during the dot-com boom: former Chief Financial Officer William J. Ruehle and current General Counsel David A. Dull.

All four have denied that they acted improperly. Samueli’s lawyer lashed out at the SEC, accusing the regulators of “trying their case in the media.”

Samueli, in an e-mail to “my colleagues and friends at Broadcom,” said it would be “inappropriate” for him to continue on the board and as an officer while the SEC case was pending.

“I will, however, continue to remain an employee of the company in the role of technology advisor to the CEO,” he said. “I also remain fully committed to pursuing energetically my family philanthropic endeavors as well as our other family business activities including the Anaheim Ducks.”

The SEC seeks to bar all four from ever serving as officers or directors of public companies. It also demands that Ruehle and Dull return “ill gotten gains” of $100,000 and $1.8 million, respectively, and that Nicholas and Ruehle repay unspecified bonuses and stock sale profits.

Nicholas and Samueli, who formed a two-man committee that awarded 95% of the options, never received any backdated options themselves.

But the SEC suit said that as “a result of the misconduct of Nicholas, Samueli, Ruehle and Dull, Broadcom’s books and records falsely and inaccurately reflected, among other things, the dates of option grants, the company’s stock-based compensation expenses, the company’s operating results, and at least one employee’s hire date.”

Because of the alleged fraud, Broadcom restated its financial results in January 2007 and reported more than $2.2 billion in additional compensation expenses. It was the biggest restatement among 250 companies that have reported possible problems with stock option grants.

The complaint follows Broadcom’s agreement April 22 to pay $12 million to settle an earlier SEC lawsuit that made similar allegations, but against the company itself. That suit alleged that the backdating scheme ran from June 1998 through May 2003, a time of “tremendous growth” for the company. Federal prosecutors also have identified Samueli and Nicholas as “potential co-conspirators” in an ongoing criminal investigation. The SEC’s lawsuit does not preclude a separate action by the Justice Department.

Anil Puri, dean of the College of Business and Economics at Cal State Fullerton, said the SEC lawsuit and possible criminal charges “could be quite damaging” to Broadcom, which he described as well respected in the industry.

“Henry Samueli is the key person driving the company, the key person in the creation of the company and the running of the company,” Puri said. “If such a key individual had to step down, it would have a major impact on the future performance of the company.”

Samueli attorney Gordon Greenberg said his client had relied on “management and other professionals” to ensure that options were granted properly.

“The SEC press release failed to mention that an independent team of lawyers and forensic accountants hired by Broadcom’s outside board members in 2006 thoroughly examined Broadcom’s options granting processes and filed a report with the SEC that fully exonerated Dr. Samueli,” Greenberg said in a statement.

Broadcom makes computer chips used in Apple Inc.'s iPods, mobile phone headsets and Nintendo Co.'s Wii game console.

Like many other technology companies, it had used stock options as a way to attract talent and build employee loyalty while conserving cash. Indeed, it capped salaries at $110,000 a year for most employees -- far less than they could have made at competitors -- while providing them with some of the richest options packages.

Michael Schulman, chief executive of the Anaheim Ducks and chairman of Anaheim Arena Management, the Samueli-owned company that operates the Honda Center, said the lawsuit would have no effect on the operations of the Ducks, whose season ended a few weeks ago when they were eliminated in the first round of the Stanley Cup playoffs.

Bill Daly, the NHL’s deputy commissioner, said Wednesday’s announcement “has no impact on Henry’s status as an NHL owner or on his ownership of the Ducks.”

Since making his fortune in the late 1990s, Samueli has built a reputation for lavish charitable giving. In Orange County, this has made him a standard-bearer of a group of new philanthropists who got rich on high-tech rather than real estate.

Samueli’s foundation has spread more than $200 million among various causes, including large gifts to Jewish centers, to medical research, to the engineering schools at UCLA and UC Irvine, and to the arts. He has donated heavily to Opera Pacific, and the Samueli Theater in Costa Mesa is named for him.

Although Nicholas could not be reached for comment Wednesday, he has in the past denied allegations of wrongdoing. He remains a major shareholder in Broadcom, but his recent life has been marred by acrimonious divorce proceedings, allegations of drug abuse and accusations by former contractors that he sought to build a secret “sex lair” for prostitutes beneath his former home in Laguna Hills.

Nicholas blamed disgruntled former employees for the most serious allegations, contending that they were trying to extort financial settlements from him.

Ruehle’s attorney, Richard Marmaro, said the former CFO “always acted in good faith and believed Broadcom’s financial statements were true, correct and accurate.”

“Bill Ruehle denies the allegations in the SEC’s complaint that he retroactively determined the grant dates for Broadcom’s stock options or that he, or any of Broadcom’s other senior executives, engaged in a scheme to defraud investors or misstate the company’s financial statements,” Marmaro said. “When the full truth comes out, we are confident that he will be fully vindicated.”

An attorney for Dull, Seth Aronson, said the company’s April settlement with the SEC precluded his client and other Broadcom executives from denying the allegations in the earlier complaint.

“On that basis we cannot comment now, but will respond to the SEC’s complaint against Mr. Dull at the appropriate time,” Aronson said.

An option is a right to buy shares at a set price in the future, typically the closing price of the company’s stock on the date the option was granted. In that case, they are valuable to recipients only if the stock price rises, motivating them to help the company.

Broadcom, like many other technology companies, backdated grants to take advantage of lower closing prices, so the options already were “in the money” when the recipients received them, the SEC said. That allegedly allowed Broadcom to improperly reward employees without having to report that expense to its other shareholders, the SEC said.

Nancy Tullos, a former Broadcom vice president of human resources, has pleaded guilty to one count of obstruction of justice and paid a $100,000 fine. She also agreed to forego a claim for more than $1.2 million in Broadcom stock options, representing her profit from backdated options.

A federal judge ruled in March that she had “disgorged” the $1.2 million when Broadcom canceled her stock options, totaling $4.27 million, in December 2006.


Times staff writer Christopher Goffard contributed to this report.



Options primer

What are stock options?

An option is the right to buy a stock for a set amount -- the exercise price -- within a certain period of time. Usually, the exercise price is the stock market value on the day the option is granted, which means the recipient reaps a reward if the share price rises.

What is backdating?

Retroactively setting a stock option exercise price to a low point in the stock’s value is known as backdating.

How widespread was backdating?

The Securities and Exchange Commission has reached civil settlements with eight companies and at least 30 former executives over improper backdating since late 2006. The SEC has investigated more than 100 companies.

Which executive has paid the most?

William McGuire, former chief executive of UnitedHealth Group Inc., agreed in December 2007 to pay $468 million to settle accusations that he secretly padded his paycheck by backdating stock options.


Source: Scott Wilson, Times staff



Broadcom history

1981: Henry Samueli and Henry T. Nicholas III meet while working on a Defense Department contract.

1991: Samueli and Nicholas write checks for $5,000 each to found Broadband Telecom, based at Nicholas’ Redondo Beach home.

1995: Broadcom moves to Irvine.

April 17, 1998: Broadcom goes public; stock jumps 123% the first day.

2000: Broadcom joins the S&P; 500 as revenue tops $1 billion; head count is 2,391.

Jan. 23, 2003: Nicholas quits as chief executive.

May 18, 2006: Broadcom’s audit committee begins review of option grants after analysts and media suggest the company used backdating to boost the value of grants.

June 9, 2006: Securities and Exchange Commission tells Broadcom it will seek information on its stock option grants.

July 14, 2006: Broadcom says its review found misdated option grants from 2000 through 2002.

Sept. 8, 2006: Broadcom reports finding misdated options back to 1998, estimates charges of at least $1.5 billion.

Dec. 14, 2006: SEC issues formal order of investigation, giving it subpoena power.

March 5: Former human resources director Nancy Tullos agrees to settle backdating claims.

April 22: Broadcom agrees to pay $12 million to settle SEC charges of option backdating.

May 14: SEC files a civil complaint accusing Samueli, Nicholas, former Chief Financial Officer William Ruehle and General Counsel David Dull of fraudulently backdating options.


Source: Times research