SEC charges Broadcom co-founders for stock-options backdating, Samueli resigns as chairman

The SEC complaint comes less than a month after the Irvine, Calif-based communications chipmaker agreed to pay $12 million to close its suit with the SEC regarding backdating stock-option grants.

By Suzanne Deffree, Managing Editor, News -- Electronic News, 5/14/2008

The Securities and Exchange Commission (SEC) today charged two current and two former top officers of Broadcom Corp for their alleged participation in a “five-year systematic scheme to secretly backdate stock options granted to virtually all Broadcom officers and employees.”

The SEC’s complaint, filed in federal district court for the Central District of California, claims that Broadcom’s former CEO and co-founder Henry T. Nicholas III; chairman, CTO, and co-founder Henry Samueli (pictured left); former CFO William J. Ruehle; and general counsel David Dull from 1998 to 2003 fraudulently backdated stock-option grants, failing to record billions of dollars of compensation expenses and falsifying documents to further the fraud.

On the civil complaint, Samueli and Dull have each taken leaves of absence as executive officers of Broadcom pending resolution, Broadcom announced this evening. Also pending resolution of the civil action, Samueli has resigned as a member of the board and as chairman. The board has named John E. Major, an independent director of the company since January 2003, to serve as non-executive chairman.*

The SEC complaint comes less than a month after the Irvine, Calif-based communications chipmaker agreed to pay $12 million to close its suit with the SEC regarding backdating stock-option grants. In doing so, the company did not admit or deny the SEC’s allegations.

The complaint also comes after Broadcom in January 2007 restated earnings and reported more than $2 billion in additional compensation expenses.

Further, the SEC complaint comes after ex-Broadcom VP of human resources Nancy Tullos in March was fined $1.3 million by the SEC for allegedly participating in stock-options backdating, and Nicholas and Samueli in January were named as “unindicted potential co-conspirators” by federal prosecutors in an investigation into the communication company’s backdating of stock options.

“As alleged in the complaint, the executives at Broadcom perpetrated a massive, five-year scheme that involved fraudulent backdating of dozens of option grants, falsifying corporate records, intentionally false accounting, and lying to shareholders,” said Linda Chatman Thomsen, director of the SEC’s division of enforcement, in a statement today. “This egregious misconduct resulted in the largest accounting restatement to date arising from stock-option backdating and warrants the significant sanctions sought from these individuals.”

According to the SEC’s complaint, Nicholas and Samueli served on a two-member option committee that had authority to approve options to employees and all but the most senior officers, whose grants were to be decided by two independent directors comprising Broadcom’s compensation committee. The SEC alleged in its complaint that the option committee approved as many as 88 grants during the five-year period, but for many of the grants the committee neither held meetings nor made decisions on the dates the grants were supposedly approved. Instead, according to the SEC, Ruehle selected most of the grant dates retroactively based on a comparison of Broadcom’s historical stock prices, and Nicholas and Samueli concealed the backdating by signing false committee written consents stating that the grant had been approved “as of” the retroactive date.

Further, the SEC alleged in its complaint that Nicholas, Samueli, and Ruehle decided on option grants to Broadcom’s senior officers and used hindsight to select the dates for them. According to the SEC, Dull (pictured left) knew about and participated in the backdating and was involved in the preparation, review, and approval of false board and compensation committee meeting documents to conceal two backdated grants in 2001, one of which awarded him options to purchase 300,000 shares.

The SEC also alleged that Ruehle and Dull each personally benefited from the backdating scheme by receiving and exercising backdated grants that were in-the-money by more than $100,000 for Ruehle and $1.8 million for Dull.

"It is important to note that the government's charges pertain to events that occurred half a decade to nearly a decade ago," Major said in the company's statement. "In mid-2003 the company significantly strengthened its equity-award practices, putting into place rigorous processes for equity awards. We believe that the company's current practices are among the best anywhere. In early 2007, our audit committee, comprised entirely of independent directors, engaged independent counsel to determine that Broadcom's current equity granting processes are appropriate and sound and have been consistently adhered to since June 2003." 

While Samueli and Dull are on leaves of absences from their elected officer posts, they will continue to serve as non-officer employees of the company, reporting to CEO Scott A. McGregor, in their areas of expertise, Broadcom said, noting that Samueli will focus on technology and Dull on strategic initiatives and litigation matters. The company said the two executives will not be involved in matters dealing with corporate governance, financial reporting, or public disclosures, and will no longer have the power to bind Broadcom under agreements. Further, Broadcom said Samueli will not be standing for re-election to the board at the company's 2008 annual meeting of shareholders.

SEC charges

Through the complaint, the  SEC is charging Nicholas, Samueli, Ruehle, and Dull with violating or aiding and abetting violations of the antifraud, record-keeping, financial reporting, and internal controls provisions of the federal securities laws. The SEC also alleges that Nicholas and Ruehle violated the proxy and false statements to auditors provisions and signed certifications required by the Sarbanes-Oxley Act of 2002 that were false and misleading concerning Broadcom’s 2002 through 2005 periodic reports. In addition, the SEC alleges that Ruehle and Dull violated the securities ownership reporting provisions.

The SEC said it is seeking permanent injunctions, civil monetary penalties, and officer-and-director bars against each of the individuals, disgorgement with prejudgment interest against Ruehle and Dull, and reimbursement of bonuses and profits from stock sales from Nicholas and Ruehle pursuant to Section 304 of the Sarbanes-Oxley Act.

Editor's note: This story was updated at 9:10pm eastern to reflect Broadcom's statement.