Risk Management

Broadcom Pays $12 Million for Backdating

It consents to SEC charges that it falsified income through a stock-option timing arrangement.
Stephen TaubApril 22, 2008

Broadcom Corp. agreed to pay $12 million to settle Securities and Exchange Commission charges that it falsified its reported income by backdating stock option grants over a five-year period.

Without admitting to or denying the SEC’s allegations, Broadcom also agreed to a permanent injunction against further violations of the antifraud, record-keeping, financial reporting, internal controls, and proxy provisions of the federal securities laws.

“The backdating scheme at Broadcom went on for five years, involved dozens of option grants, and resulted in the largest accounting restatement to date arising from stock option backdating,” said Linda Chatman Thomsen, director of the SEC’s Division of Enforcement. “The scope and magnitude of the fraud warrants the significant penalty imposed on the company.”

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The SEC said that as a result of the fraud, the semiconductor maker restated its financial results in January 2007 and reported more than $2 billion in additional compensation expenses. The complaint alleged that from June 1998 to May 2003 Broadcom, acting through its top officers, misrepresented the dates on which stock options were granted to executives and employees.

It asserted that Broadcom’s chairman and chief technology officer, along with its former CEO, sat on the option committee that had authority to approve options to employees, and all but the most senior executives. Their grants were to be decided by two independent directors comprising Broadcom’s compensation committee.

The SEC alleged that the committee approved as many as 88 grants, although for many of the grants no meeting was held and no decision reached on the dates the grants were supposedly approved.

Instead, Broadcom’s former CFO allegedly selected many of the grant dates retroactively based on a comparison of Broadcom’s historical stock prices, and the two option committee members allegedly concealed the backdating by signing false committee written consents stating that the grant had been approved “as of” the retroactive date, according to the SEC.

Through backdating, Broadcom made it appear that the options were granted at times corresponding to low points of the closing price of Broadcom’s stock — despite the purported grant having no relation to the grant approval date, according to the regulator. This resulted in artificially and fraudulently low exercise prices for those options.

In addition, the SEC’s complaint said that the top officers — not the compensation committee — decided on option grants to Broadcom’s executives and used hindsight to select the dates for them. According to the SEC, Broadcom’s general counsel directed the preparation of false board and compensation committee written consents to conceal some of these grants.

The SEC further said that, as a result of the backdating scheme, Broadcom avoided reporting $2.22 billion in compensation expenses during the relevant period. Broadcom overstated its income by between 15 percent and 422 percent, and understated its loss by between 16 percent and 38 percent. The unrecorded compensation expenses and hidden backdating practices led Broadcom to provide false and misleading disclosures to its shareholders in filings with the SEC through 2005, it adds.

Last month, Broadcom’s former vice president of human resources, Nancy M. Tullos, settled SEC charges that she participated in a five-year scheme to backdate stock options granted to Broadcom employees and officers.

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