Accounting firm Ernst & Young must face a class action suit over option backdating at Broadcom Corp., a federal appeals court has ruled, saying the auditors knew or should have known about the resulting misrepresentations in the Irvine tech company's financial statements.
A three-judge panel of the U.S. 9th Circuit Court of Appeals in San Francisco reinstated Ernst & Young as a defendant in the investor lawsuit, overturning a 2009 decision by U.S. District Judge Manuel L. Real. The lower-court judge had ruled that there was too little evidence to show that the auditors knew about the backdating.
Charles Perkins, a spokesman for Ernst & Young, said after the appellate ruling was issued Thursday that the plaintiffs' claim had no merit.
Broadcom was one of about 200 companies that were caught up in a wave of option-backdating scandals that broke beginning in 2006. In awarding stock options to employees, the firms had secretly dated them retroactively to times when the companies' share prices were at low points, potentially giving the employees more money when they cashed in the options later.
The backdating itself wasn't illegal. The problem was not disclosing the additional compensation created by the boosting the value of the options.
Broadcom, which had used stock option grants liberally to attract key staff members, was forced to restate its financial results in 2007 to add $2.2 billion in expenses. The company makes microchips used in devices such as laptop computers, cable TV boxes and Apple Inc. iPhones.
Ernst & Young had already been working with Broadcom to correct option-related misrepresentations when the auditors signed off on fresh misrepresentations of option values in 2005 and 2006, the appeals panel said.
The auditors "apparently accepted management at its word, never received requested documentation and issued an unqualified opinion on the accuracy of Broadcom's financial statements," the panel said, adding that the accounting firm's audit "amounted to no audit at all."
Perkins, the Ernst & Young spokesman, said Thursday, "We believe our audit work was conducted professionally and appropriately."
The class action suit alleges that the misrepresentations caused Broadcom's stock price to be artificially inflated, resulting in investor losses.
The appeals court's action sends the case against Ernst & Young back to Real for trial, barring other successful legal challenges by the defendants.
Broadcom settled with the plaintiffs in December 2009, agreeing to pay them $160 million.
Current Broadcom directors include Los Angeles Times Publisher Eddy W. Hartenstein, who joined the board in 2008.