Accusing prosecutors of a "shameful" campaign to intimidate witnesses and obtain unjustified convictions, a federal judge threw out high-profile criminal stock fraud charges against Broadcom Corp. co-founder Henry T. Nicholas III and the company's former chief financial officer.
U.S. District Judge Cormac J. Carney issued his ruling Tuesday, less than a week after he overturned a guilty plea by company co-founder and Anaheim Ducks owner Henry Samueli.
The judge also dismissed a civil lawsuit that the Securities and Exchange Commission had filed against Broadcom executives, wiping away misconduct allegations that had plagued the Irvine-based microchip giant for years.
Samueli and Nicholas, both in the Santa Ana courtroom, embraced and sobbed. William J. Ruehle, the chief financial officer, thanked Carney and then hugged his attorney, Richard Marmaro. "It's the ultimate vindication for Broadcom," Samueli told reporters outside Carney's courtroom. "To see Broadcom's name smeared was so painful to me."
Nicholas did not speak to reporters after the dismissal. Instead, the billionaire issued a statement saying he was "deeply grateful" for Carney's decision, which he said "reaffirmed my belief and faith in the justice system."
Broadcom was one of numerous fast-growing companies ensnared in the federal government's nationwide dragnet aimed at complicated cases involving the backdating of stock options.
In remarks that followed two months of testimony, Carney cataloged what he called the government's misdeeds. He said the government's treatment of Samueli "was shameful and contrary to American values of decency and justice." The judge called him "a brilliant engineer and a man of incredible integrity."
The acting U.S. attorney for most of Southern California, George S. Cardona, told the judge: "We have heard your decision; respectfully, we disagree with it. I don't think that comes as a surprise to you."
Prosecution attorneys had maintained they acted properly and urged the judge to let the jury decide Ruehle's fate. A spokesman for the U.S. attorney's office said prosecutors had not yet decided whether to appeal any of the judge's decisions.
Carney scheduled a Feb. 2 hearing to decide whether to dismiss additional criminal charges that Nicholas provided cocaine, Ecstasy and other drugs to friends and business associates. Nicholas has pleaded not guilty and has denied any wrongdoing. In his remarks, the judge suggested the government's conduct may have prejudiced its drug case against Nicholas.
The judge said the government unreasonably demanded that Samueli submit to as many as 30 "grueling" interrogations, falsely stated and improperly leaked to the news media that he was not cooperating in the government's investigation, and improperly pressured Broadcom to terminate his employment.
In reviewing the case, the judge singled out the way the government handled two witnesses. He said Nancy Tullos, a former Broadcom vice president of human resources who refused to cooperate in the investigation, was fired from a new job after a prosecutor called her employer and disclosed allegations against her.
Subsequently, she agreed to plead guilty to a charge the judge called "questionable," and testified against Ruehle in a way the judge said seemed "scripted." She awaits sentencing, although her case may be affected by Tuesday's events.
The judge said the government also pressured former Broadcom general counsel David Dull to testify in a way that favored the prosecution.
Carney saved some of his harshest criticism for Assistant U.S. Atty. Andrew Stolper, the lead prosecutor in the case, saying at one point, "The lead prosecutor somehow forgot that truth is never negotiable."
Thom Mrozek, a spokesman for the U.S. attorney's office in Los Angeles, declined to say whether his office intended to investigate the alleged prosecutorial misconduct.
David Kettel, a former federal prosecutor, said judicial findings of prosecutorial misconduct are typically investigated by the Justice Department's Office of Professional Responsibility for possible discipline.
"Considering the comments by Judge Carney, it's going to be a long investigation," said Kettel, who now practices white-collar criminal defense in Los Angeles. "It will be their call what to do."
Broadcom Chief Executive Scott McGregor said the dismissals were important "because they remove an issue that, for some observers, may have partially obscured Broadcom's tremendous business successes."
Broadcom, which recorded nearly $5 billion in sales last year, designs chips used in such products as Apple iPhones and Bluetooth headsets. Prosecutors alleged that Samueli, Nicholas and Ruehle conspired to backdate options in order to make them more valuable to employees without accounting for the expense in regulatory filings. In 2007, amid an SEC investigation, the company restated its financial results to account for $2.2 billion in option expenses dating back many years.
Defense attorney Marmaro argued that Ruehle played no role in the backdating decisions and said Broadcom was one of more than 200 companies that had to restate options expenses because of innocent accounting mistakes.
Carney's decision to dismiss Nicholas' options case was unusual because it came during Ruehle's trial, with no motion by Nicholas pending and was accompanied by the decision to dismiss the SEC lawsuit.
"I've never heard of it happening," said Kettel, the former prosecutor. "I guess Judge Carney views prosecutorial misconduct as a worse offense than criminal misconduct."
Explaining his decision to a packed courtroom, Carney said prosecutors had pressured Broadcom employees to cooperate as witnesses while failing to recognize that their case was significantly flawed.
"I'm sure there are going to be many people who are going to be critical of my decision . . . and argue that I'm being too hard on the government," the judge said. "I strongly disagree. I have a solemn obligation to hold the government to the Constitution. I'm doing nothing more and nothing less."
Tuesday's court action was the latest in a series of setbacks for federal cases alleging the misdating of stock options. McAfee Inc.'s former general counsel, Kent Roberts, was acquitted last year in one such case. In August, an appeals court threw out the conviction of Brocade Communications' former CEO, Gregory Reyes, ruling prosecutors made improper statements to the jury.
In one of the highest-profile backdating cases still pending, former KB Home CEO Bruce Karatz is facing trial in Los Angeles on federal charges of backdating options for himself and other executives, defrauding shareholders. Karatz has denied the accusations and pleaded not guilty.