Accounting & Tax

Broadcom Options Probe Intensifies

Stock-option practices at the semiconductor maker are the subject of grand-jury subpoenas and interviews by federal prosecutors.
Stephen TaubMay 2, 2007

The federal probe of Broadcom’s stock-option practices is intensifying.

In a regulatory filing, the semiconductor maker disclosed that it has produced documents in response to grand jury subpoenas. Broadcom also stated that the U.S. Attorney’s Office for the Central District of California has begun to interview present and former employees. The company pledged to cooperate.

“Grand jury subpoenas are an integral and expected part of any U.S. Attorney’s Office investigation, and we do not consider them to have any independent significance,” asserted Broadcom spokesman William Blanning, according to The Los Angeles Times.

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The company also warned in its filing that any action by the Securities and Exchange Commission, the U.S. Attorney, or another governmental agency could result in civil or criminal sanctions against the company and certain current or former officers, directors, and employees.

In June 2006, Broadcom received an informal request from the SEC staff for information on its options practices; the commission later issued a formal order of investigation and a subpoena for the production of documents. The company was first informally contacted by the U.S. attorney last August.

In January, Broadcom took a $2.259 billion charge to correct for improperly recorded stock options. The company concluded 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.

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

In a regulatory filing at the time, 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. On Wednesday, his attorney could not immediately be reached for comment.

Nicholas’s attorney, John Spiegel, said in a statement earlier this year that Broadcom’s audit committee had determined that the former CEO “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.”

Tullos’s attorney, Ismail Ramsey, said in a statement at the time: “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.”

Broadcom stressed in January 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.

According to the Times, people with knowledge of the investigation have said that Broadcom’s chairman and co-founder, Henry Samueli, had refused to be interviewed because the government wouldn’t assure him he was only a witness and not a subject of the criminal investigation. On Wednesday, his attorney could not immediately be reached for comment.