The former CFO and CEO of Broadcom Corporation have been indicted by a federal grand jury in California on securities fraud and conspiracy charges related to backdating stock options that caused the company to take a $2.2 billion write-down in 2007. The restatement is reported to be the largest accounting charge taken in connection with an options backdating case.

The one-time finance chief William J. Ruehle, 66, and his former boss, chief executive Henry T. Nicholas, 47, were charged with concealing, understating, and mischaracterized compensation expenses tied to the grants, according to the indictment that was brought in U.S. District Court in Orange County California, last week.

In a separate indictment, Nicholas was taken into custody on drug charges, that police say involved a “warehouse” of cocaine and the CEO slipping Ecstasy into the drinks of other executives. Furthermore, in May, Nicholas, Ruehle and others were charged by the Securities and Exchange Commission for violating securities law.

The current U.S. attorney’s indictments, unsealed on Thursday, allege that between 1999 and 2005, Ruehle, Nicholas, and other Broadcom managers, conspired to backdate stock option grants by selecting grant dates in the past — when the stock price had been lower than the current market price — which gave the options immediate value (putting them “in-the-money”.) In addition, the CFO and Nicholas are charged with making false claims to Broadcom’s independent auditor, Ernst & Young, and falsifying documents filed with the SEC, including the company’s Form 10-Ks, Form 10-Qs, and proxy statements.

“Bill Ruehle is innocent of the charges in the indictment, and he looks forward to the opportunity to clear his good name in a court of law, said Ruehle’s attorney, Richard Marmaro. The defense attorney continued: “At all times, Bill acted in good faith and believed Broadcom’s financial statements were accurate … This is a classic case of government overreaching. The government’s indictment unsuccessfully attempts to transform a company’s technical accounting error into criminal conduct.

Nicholas’ attorney, Gregory Craig, did not immediately return CFO.com’s phone call seeking comment. However, in a widely reported statement, Craig said that Nicholas was innocent and would fight the charges. “It’s a kitchen-sink attack on Dr. Nicholas. They’re trying to throw everything at him from eight years ago,” Craig said, according to the Associated Press.

The indictment detailed several alleged schemes focused on backdating stock options, one involving what is known as a “focal” grant process. Introduced at Broadcom in 2000, the focal grant revamped the older practice of issuing options to individual employees on the anniversary of their date of hire. Instead, the new program distributed stock option to all employees in the company at one time. The options were issued on a performance basis according to a “matrix” developed by management. In addition, the market value of the grants and change to the distribution program needed to be vetted and approved by the board’s options committee to garner favorable accounting treatment.

During the summer of 2000, Ernst & Young expressed concerns to Broadcom’s management that the first round of focal grants, issued on May 26, 2000, were not handled properly because there was no evidence that the options committee approved the market value of the options price, authorized millions of options grants at that price, or okayed the change to the compensation system. The May series of grants totaled more than 7 million options to employees and 550,000 to company officers. According to the court documents, Ruehle and Nicholas were made aware of Ernst & Young’s concerns, including the auditor’s claim that Broadcom would have to take $700 million compensation charge for grant.

Ruehle allegedly informed Nicholas that he was not “about to let that happen,” referring to the accounting charge, and instructed his finance staff that “Broadcom had to ‘win this one’ with Ernst & Young,” noted the court documents.

The indictment asserts that to notch a win, Ruehle and others made false statements to Ernst & Young, including telling the auditor that Broadcom’s options committee authorized the market value of the options, the distribution of the millions of options, and focal plan and matrix formula. To support the claim to the Ernst & Young, Ruehle reportedly directed the finance staff to create documents, including false minutes of the options committee meeting that purportedly took place on May 26, 2000, and approved a grant of 7 million options based on the matrix formula for distributing the grants, says the indictment.

Another incident described in the indictment involved an engineer who was fired from Broadcom in October 2000 — at which time his options ceased to vest. The engineer sued the company alleging, among other things, that Broadcom backdated his employment documents to provide him with in-the-money options, concealed the backdating from Ernst & Young, artificially inflated earnings by not recording the appropriate compensation-related expenses, and failed to disclose the failure to expense the options in regulatory documents.

Nicholas reportedly met with the engineer and “pleaded” with him not to go public with the allegations, offering to vest his remaining options, which were worth $7 million. According to the court documents, the engineer took the deal.

The indictment also contained a tale of desperation during a time when Broadcom’s stock was tumbling and options were no longer an incentive to retain key employees. As a result, Ruehle and Nicholas allegedly orchestrated “top up” schemes, while Nicholas called for a “double up and cancel” scheme.

The top up grants were a way to breathe life back into worthless options — so-called underwater options— by giving them a more favorable strike price. The double up and cancel scheme is more complicated, but also helps executives that hold underwater options. In the double up plan, additional options are awarded to the executives to make up for worthless options in exchange for an undocumented, oral side agreement with the company not to exercise the worthless options should they again become valuable. Since it is undocumented, the transaction is hidden from independent auditor and the company does not recognize the compensation expense.

When Ruehle was made aware of the double up scheme, he allegedly sent an e-mail to Nancy Tullos , the head of human resources at Broadcom at the time — and also named in the indictment as a co-conspirator. In the message, prosecutors say, Ruehle told Tullos to tell Nicholas that the double up proposal was not a good idea. Ruehle allegedly stated: “If we get too cute E&Y will blow the whistle on our whole program.”