Risk Management

Broadcom “Conspirators” Are Outed

A plea deal with a former H.R. chief results in the disclosure that two company co-founders are being scrutinized for complicity in stock-option ba...
Stephen TaubJanuary 25, 2008

Federal prosecutors have identified Broadcom co-founders Henry T. Nicholas III and Henry Samueli as “unindicted potential co-conspirators” in an investigation into the illegal backdating of stock options, the Associated Press has reported.

The disclosure came as a result of a plea deal with Nancy Tullos, the former head of human resources at Broadcom. In November she agreed to plead guilty to obstruction of justice in the backdating case. Tullos was accused of instructing a subordinate to delete an E-mail that was evidence of option backdating by Broadcom senior executives and board members. In her plea deal, she agreed to cooperate with federal authorities in the investigation.

Samueli is Broadcom’s chairman and chief technical officer, while Nicholas is no longer with the company. They were identified as “Executive A” and “Executive B” in the plea agreement, according to the AP report, but U.S. District Judge Cormac Carney told prosecutors that not identifying them would undermine the factual basis of the plea deal and violate the principles of open court hearings.

Assistant U.S. Attorney Andrew Stolper argued that releasing their names, as well as that of a third Broadcom individual who received backdated options, would create prejudice against them since they haven’t been indicted. The judge replied: “Both parties know exactly who we’re talking about.”

An attorney for Nicholas said in a statement that Tullos’s plea did not indicate the stock-option grant to the engineer was illegal, adding that “Broadcom’s audit committee has affirmed through an independent investigation that Dr. Nicholas didn’t personally benefit from any alleged options backdating and that he sought advice from appropriate persons regarding the process for option grants.”

In November the U.S. Attorney said that when Tullos helped other Broadcom executives recruit an engineer to work for the company in 1999, she ordered the subordinate to backdate his hiring to lock in a lower stock-option strike price. When asked in an E-mail about this instruction, Tullos responded: “pls. delete this message,” according to the government.

Broadcom took a $2.259 billion charge in January 2006 to correct for improperly recorded stock options. The semiconductor 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. The company placed much of the blame for its option woes on three former executives: Nicholas, CFO William Ruehle, and Tullos.

Tullos faces a maximum sentence of 10 years in prison when she is sentenced on May 5. Most observers expect her to receive a lighter sentence.