Broadcom to pay $160.5 million to settle stockholder suit

Broadcom Corp. said Tuesday it would pay $160.5 million to settle a securities fraud lawsuit over backdated stock options, an agreement that comes less than three weeks after a federal judge threw out related criminal cases and a government civil action.

The resolution marks the third time Broadcom has agreed to pay millions of dollars to settle options-related litigation, but the company cast the development as the beginning of the end for the long-running controversy.

“Today’s settlement brings Broadcom closer to the day when we can put the stock-option cases behind us once and for all,” said Scott McGregor, chief executive of the Irvine microchip company.

Tuesday’s settlement covers class-action litigation filed on behalf of investors who bought Broadcom stock between July 21, 2005, and July 13, 2006. The suit evolved from a case brought by a New Mexico investment council that accused Broadcom and top executives of misleading investors by understating expenses.


Details of how the money from the settlement will be distributed to shareholders will be released at a later date, the company said.

Broadcom said it would record a fourth-quarter charge for the settlement, which must be approved in federal court. The company didn’t admit any wrongdoing but said it expected to incur additional costs in connection with remaining options-related cases.

Broadcom’s $2.2-billion restatement of financial results in early 2007 was the largest resulting from a wave of stock-option scandals involving some 200 U.S. firms.

The dating of options gained notoriety after academic studies in 2006 showed that scores of companies, particularly in the technology field, had awarded employees stock options that were dated retroactively to times when the firms’ share prices were at low points, giving employees even bigger paydays when they cashed in the options later at higher prices.


Options are rights to buy shares of a company’s stock for a certain period of time at a specific price, usually set at the stock’s market price the day the options are granted. The practice of backdating options -- which is legal as long as it and the added expense are disclosed to investors -- boosted their value to the employees who received them.

Broadcom, with annual sales of about $5 billion, had used stock options liberally to attract and keep key design engineers. The company employs 7,000 people around the world and engineers communications chips used in devices such as laptop computers, cable TV boxes and Apple iPhones. Current Broadcom directors include Los Angeles Times Publisher Eddy W. Hartenstein, who joined the board in 2008.

Broadcom has been whittling away at the court cases stemming from the backdating scandal.

In an April 2008 civil settlement, it paid $12 million in a Securities and Exchange Commission case that accused the tech firm of falsifying its reported income by illegally backdating options for five years.

Last August, the company said its insurers had agreed to pay $118 million to settle a lawsuit accusing the company’s top officials of mismanagement and unjust enrichment through the misdating of options.

In restating its revenue and expenses in early 2007, the company itself said that co-founder Henry T. Nicholas III, its former chief executive, bore “significant responsibility” for improperly dating options from 1998 through mid-2003, and that former Chief Financial Officer William J. Ruehle was “at the center of the flawed option granting process.”

But this month, U.S. District Judge Cormac J. Carney cited a lack of proof and misconduct by prosecutors in dismissing related criminal charges against Nicholas, Ruehle and co-founder Henry Samueli. Carney also dismissed a second SEC civil lawsuit filed against the three men.

Attorneys for the three argued that the rules governing options grants were ill-defined in the late 1990s and early this decade, when the backdating occurred, and that the defendants, like executives at scores of other companies, never intended to violate the law.


Nicholas, who still faces criminal charges of distributing cocaine, Ecstasy and other illegal drugs, would not comment on Tuesday’s settlement, a spokesman said. Lawyers for Ruehle and Samueli could not be reached.

Broadcom’s settlements are at the high end in options backdating cases, but far from the heftiest.

UnitedHealth Group in July 2008 agreed to pay $895 million to settle a class-action suit brought by pension funds accusing the giant healthcare company of improperly providing executives with windfalls by backdating stock options given as incentive payments.