Risk Management

Broadcom, Samueli Face SEC Charges

SEC notification reflects its investigation into stock-option granting practices.
Stephen TaubJuly 23, 2007

Broadcom Corp. said that the Securities and Exchange Commission may charge both the company and its chairman in connection with an SEC investigation into its stock-option granting practices and related accounting issues.

The semiconductor maker said in a regulatory filing that the company, and its co-founder, chairman and chief technical officer, Dr. Henry Samueli, received Wells notices from the SEC that indicated that the regulator intends to recommend a civil action for possible violations of securities laws. Under the process, recipients may respond in writing before the SEC staff makes any formal recommendation.

The company and Dr. Samueli intend to provide written responses to the Wells notices and may seek meetings with the SEC staff, Broadcom said in its filing. It said it continues to cooperate with the SEC, but that it does not know when the investigation will be resolved or what, if any, actions the SEC may require it or Dr. Samueli to take.

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In January Broadcom took a whopping $2.259 billion charge
to correct for improperly recorded stock options, which was by far the largest charge of any company involved in the spreading options scandal, according to Reuters at the time. The company had said last July that it anticipated a charge of $750 million, and in September upped its estimate to about $1.5 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.

The company previously 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. Ruehle retired from the company last September, two days before he was to be interviewed as part of a conduct review.

Earlier this month we noted that reports had circulated widely about an ex-employee’s lawsuit claiming that Nicholas’s leadership was a time of frequent drug use in the office and the hiring of prostitutes for clients.

Legal documents in the suit filed by Kenji Kato, who said he was Nicholas’ bodyguard and personal assistant for seven years, according to the Associated Press, were filed on May 10 in Los Angeles County Superior Court. The AP said Kato seeks $3 million in settlement money, plus unspecified damages related to his 2006 resignation from the company.

According to the Los Angeles Times, Kato alleged that Nicholas required him to oversee supplies of cocaine and other drugs, to pay prostitutes from a company petty-cash fund, and to keep Nicholas’ wife and others from learning about the “extracurricular activities” of the boss. Kato said that Nicholas secretly spiked drinks of business associates with drugs and ordered aides to fill balloons with laughing gas to entertain party guests. Nicholas was quoted at the time as calling the accusations “absurd.”

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