Judicial system takes a hit in Broadcom case

Connoisseurs of salacious gossip about the rich and famous must have found themselves in pig heaven in June 2008, when federal prosecutors went after the billionaire Henry T. Nicholas III.

The indictment charging that he was part of a huge stock option manipulation scheme at Broadcom Corp., the Irvine high-tech company he co-founded, was only the beginning.

The lagniappe was a second indictment related to his personal lifestyle: allegations of his purchases of illegal drugs and his hiring of prostitutes on a heroic scale, his construction of an underground drug den, his consumption of marijuana in such volume that the pilot flying Nicholas and his entourage aboard a private jet to Las Vegas had to don an oxygen mask.

A year and a half later, the whole federal case had gone to hell. Nicholas and several other executives had been freed of all charges by a federal judge outraged at the liberties the prosecutors had taken to make their case. He even threw out the cases against two defendants who had already pleaded guilty. The Securities and Exchange Commission dropped its related civil case soon afterward.

The prosecutors could have asked a higher court to reinstate the charges. Instead, they dropped their appeal, announcing the decision on the Friday of Memorial Day weekend, as though hoping no one would notice they were slinking away.

The outcome was a terrific victory for Nicholas and the other defendants, including Broadcom co-founder Henry Samueli, a philanthropist whose name is on the engineering schools at UCLA and UC Irvine.

But it’s a disaster in many other ways. The reputation of federal prosecutors is deeply marred. The public, treated to the spectacle of billionaires skating on felony charges even if for perfectly good reasons, has to be more cynical about the fairness of the judicial system. And there’s still the empty feeling that the defendants must have done something wrong … but what?

Now that the criminal cases are in the past, it’s proper to survey the wreckage. Judge Cormac J. Carney’s action is part of a trend in recent high-profile cases in which federal judges have called major fouls on federal prosecutors. And the Justice Department, under Atty. Gen. Eric Holder, has clamped down on prosecutor excesses.

Is this a bad thing? “In the post- 9/11 years, a lot of prosecutors got emboldened to go as far as they could and play as dirty as they could, figuring that no one would stop them,” Bennett Gershman of Pace University law school, the author of a legal text on prosecutorial misconduct, told me. “Judges seem to have become emboldened by what they see the prosecutors doing.”

In April 2009, for instance, a federal judge threw out the conviction of former Sen. Ted Stevens, (R- Alaska), after learning that prosecutors had withheld evidence in his favor. In December, another judge tossed the indictments of four Blackwater contractors in connection with a shooting incident in Iraq that took 14 lives after learning that prosecutors had relied on testimony given under grants of immunity.

The Broadcom case involved stock options, which became an important part of the pay packages of employees in high-tech companies starting in the late 1990s. The options were supposed to be valueless when issued, but profitable in the future if the company did well.

The government alleged that Nicholas, Samueli and others connived to backdate Broadcom options so that the profit was guaranteed. The value of those options should have been disclosed to shareholders but wasn’t — arguably making Broadcom look more profitable than it really was.

Nicholas was traveling overseas and could not immediately be reached for comment, a spokesman said.

In any case, he and his fellow defendants aren’t exactly angels. There’s evidence that they knew the company’s auditors might look askance at the option finaglings. And under pressure from the SEC, Broadcom in 2007 restated six years of financial results to reflect $2.2 billion in previously undisclosed options expenses, an admission that it hadn’t gotten things right the first time. That was then the largest options-related restatement by a public corporation.

So it’s fair to assume that the defendants knew they were sailing close to the wind. Whether they were all fully aware that their actions flouted formal accounting standards, much less that they might have been committing a federal crime, is a different story. Of hundreds of options backdating investigations earlier this decade, only a handful resulted in criminal prosecutions, generally where executives tried to cover up by lying to the feds — and the prosecutors’ won-lost records in those cases is less than perfect.

Even before the Broadcom cases went to trial, defense attorneys were complaining that the prosecutors had gone way over the line.

Among the offenses listed for Carney in October 2008 by Richard Marmaro, an attorney for former Broadcom Chief Financial Officer William J. Ruehle, the prosecutors leaked grand jury materials to The Times and the Wall Street Journal to make Samueli and Ruehle look bad, and got one defendant fired from her new job as a tactic to make her testify against the others. The drug-and-sex indictment against Nicholas, Marmaro contended, was nothing but an “incendiary” tool to make Nicholas look so depraved that no jury could fail to convict him in the options case.

Back then, Carney wasn’t buying. He said there was no compelling evidence of anything “improper” in the prosecutors’ acts. He even rejected a proposed plea bargain for Samueli on grounds it wasn’t harsh enough.

If there was any truth to the government’s allegations of options fraud, Carney said, the plea bargain — which would have allowed Samueli to escape a prison term by pleading guilty to making one (innocuous) false statement to the SEC and paying a $12-million penalty (pocket change for a billionaire) — “will erode the public’s trust in the fundamental fairness of our justice system.”

By a year later, he had turned 180 degrees. Evidence had surfaced to back up Marmaro’s claims, along with other apparent misconduct by the prosecutors. Carney seemed especially incensed that the government had threatened to force Nicholas’ 13-year-old son to testify about his father and drugs.

Carney ruled that all three key witnesses against Nicholas and Ruehle had been hopelessly tainted by pressure from the U.S. attorney’s office. Without their testimony there was no hope of a fair trial — and since they were also key to the Nicholas drug case and the SEC proceeding against the company, he was throwing those cases out too.

So was justice served? Experts unconnected to the case say Carney’s order was extraordinary — judges don’t often use their authority to send such a message to prosecutors, and the Supreme Court hasn’t liked it much when they do — but they say the pattern of misconduct in this case looks extraordinary too.

“The judge felt the evidence was so polluted you couldn’t believe anything the witnesses said,” Gershman says.

Adds Marmaro, a former federal prosecutor, “In my view this was the only tool left to him to address the pattern of misconduct that had occurred.”

Yet did Carney have to go for the nuclear option? Before tossing the case, he made sure that the witnesses told the jury what they had gone through at the prosecutors’ hands. Jurors interviewed later said that, as a result, they already were leaning toward acquittal before Carney took matters out of their hands.

And what about proceedings such as the SEC’s case, which Carney also tossed (although he cleared the agency to refile, if it wished)? “The SEC could fairly ask, what did we do wrong?” observes Peter J. Henning, a white-collar-crime expert at Wayne State University.

That hints at the real miscarriage in the Broadcom cases: Due to the prosecutors’ behavior, the American people were deprived of their full day in court. And while the defendants are no doubt relieved at the outcome, I wonder if there’s not something bittersweet about their relief. Wouldn’t it have been even better to have been explicitly declared innocent by 12 men and women, good and true?

Michael Hiltzik’s column appears Sundays and Wednesdays. Reach him at mhiltzik@latimes.com, read past columns at https://www.latimes.com/hiltzik, check out https://www.facebook.com/hiltzik, and follow @latimeshiltzik on Twitter.