Accounting & Tax

Broadcom Records Largest Options Charge

Former CFO William Ruehle ''was at the center of the flawed option granting process,'' asserts the company.
Stephen TaubJanuary 24, 2007

Semiconductor maker Broadcom has taken a massive $2.259 billion charge to correct for improperly recorded stock options.

In July, the company had anticipated a charge of $750 million; in September, it upped that figure to about $1.5 billion. The current charge is by far the largest in the widespread options scandal, according to Reuters. In December, added the wire service, UnitedHealth Group forecast a charge of up to $1.7 billion.

Broadcom took the charge after concluding that the appropriate measurement dates for most stock options granted from 1998 to 2005 differed from the dates originally used for the grants. Substantially all of the problematic grants were made prior to 2004, it added.

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The company placed much of the blame for its options woes on three former executives: chief financial officer William J. Ruehle, president and chief executive officer Henry T. Nicholas III, and vice president of human resources Nancy M. Tullos.

In a regulatory filing, Broadcom asserted that from March 1998 until September 19, 2006, Ruehle “was at the center of the flawed option granting process.” The company added that the former CFO “bears a substantial measure of responsibility for the lack of adequate controls and appropriate documentation in the option granting process,” elaborating that “there is also substantial evidence that he engaged in subsequent allocations of grants.” In addition, Broadcom stated that Ruehle failed to provide proper advice concerning proper accounting standards, failed to establish proper procedures, and personally received some of the affected options.

Ruehle retired from the company last September, two days before he was to be interviewed as part of a conduct review. An attorney for Ruehle could not immediately be reached for comment.

As for the former CEO, Broadcom stated that Nicholas “bears significant responsibility for the lack of adequate controls in the option granting process due to the tone and style of doing business he set.” There is substantial evidence, noted the company, that at times Nicholas was involved with the selection of grant dates after the fact and with subsequent allocations of grants. On a least a couple of occasions, wrote Broadcom, Nicholas sought the advice of Ruehle and Tullos regarding the process for certain grants. The company stressed, however, that Nicholas did not personally benefit from any of the restated grants.

The filing also pointed out that for reasons unrelated to stock options, Nicholas left Broadcom as an officer in January 2003 and did not stand for re-election as a director at the annual meeting that May.

Nicholas’s attorney, John Spiegel, said in a statement that the former CEO “guided the company to record-setting growth and an unprecedented level of employee stock ownership. This resulted in stock-option grants that in hindsight should have been accounted for differently. The audit committee found that he did not personally benefit, did not knowingly engage in selecting grant dates after the fact, and sought advice from appropriate persons regarding the process for option grants.”

As for Tullos, Broadcom asserted that “while there is a lack of evidence that Ms. Tullos herself selected grant dates after the fact, there is substantial evidence she was heavily involved in that process, was fully aware of what was occurring, and encouraged, assisted in, and enabled it.” The company added that “there is also substantial evidence that Ms. Tullos was at the center of allocations of grants to individuals after the grants were made” and that she personally received some of the affected options.

Tullos’s attorney, Ismail Ramsey, said in a statement: “Ms. Tullos is neither an accountant nor a lawyer. And, as the company acknowledged, she did not herself select any of the favorable grant dates. As an HR executive, everything Nancy did to assist in processing option grants was directed and approved by her superiors and other professionals — whom she trusted and relied upon. And, in every instance, she did what everyone thought was in the best interests of Broadcom and its employees.”

Broadcom stressed that none of the stock-option grants in question were awarded to Henry Samueli, who co-founded the company with Nicholas; to the chief executives who succeeded Nicholas, Alan E. Ross and Scott A. McGregor; or to any current or former member of the board of directors.

The company also noted that options to purchase 232.9 million shares required a measurement date revision, and that options awarded to executive officers accounted for 9.7 million shares (4.2 percent). The remaining options were awarded to other employees.

Broadcom stated that the charge did not affect its previously reported revenue, cash, cash equivalents, or marketable securities balances. The company also filed its amended and delayed 2005 annual and 2006 quarterly reports with the Securities and Exchange Commission, bringing it current with SEC filings.