Risk & Compliance

SEC Charges Ex-Broadcom CFO, Three Others

In a stock-option backdating case, the commission alleges a five-year scheme related to the company's $2b-plus compensation restatement.
Stephen TaubMay 14, 2008

The Securities and Exchange Commission charged a former CFO of Broadcom Corp. and three other of its current or former officers with participating in a five-year scheme to secretly backdate stock options granted to virtually all Broadcom officers and employees.

The SEC’s complaint alleged that from 1998 to 2003 former CEO Henry T. Nicholas, former finance chief William J. Ruehle, chairman and chief technology officer Henry Samueli, and general counsel David Dull fraudulently backdated stock option grants, failed to record billions of dollars of compensation expenses, and falsified documents.

As a result of the alleged scheme, the semiconductor maker restated its financial results in January 2007 and reported more than $2 billion in additional compensation expenses.

The SEC, which said that its Broadcom investigation is continuing, alleged that the four officers 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 date bearing no relation to the grant’s actual approval. This resulted in artificially and fraudulently low exercise prices for those options, the commission asserted.

The SEC also alleged that the unrecorded compensation expenses and hidden backdating practices led Broadcom to provide false and misleading disclosures to Broadcom’s shareholders in filings with the SEC through 2005.

According to the SEC, Nicholas and Samueli served on the two-member option committee that had authority to approve options to employees and all but the most senior officers, whose grants were to be decided by two independent directors comprising Broadcom’s compensation committee. The SEC alleges that the option committee approved as many as 88 grants during the relevant period, but for many of the grants the committee neither held meetings nor made decisions on the dates the grants were supposedly approved.

Instead, Ruehle allegedly selected most of the grant dates retroactively based on a comparison of Broadcom’s historical stock prices, and Nicholas and Samueli allegedly concealed the backdating by signing false committee written consents stating that the grant had been approved “as of” the retroactive date.

The SEC also claimed that Nicholas, Samueli, and Ruehle — and not the compensation committee — decided on option grants to Broadcom’s senior officers and used hindsight to select the dates for them.

According to the SEC, Dull allegedly knew about and participated in the backdating scheme and was involved in the preparation, review, and approval of false board and compensation committee meeting documents to conceal two backdated grants in 2001, one of which awarded him options to purchase 300,000 shares. The SEC charged that Ruehle and Dull each personally benefited from the backdating scheme by receiving and exercising backdated grants that were in-the-money by more than $100,000 for Ruehle and $1.8 million for Dull.

A statement issued for Samueli by his attorney, Gordon A. Greenberg, said it was “unfortunate that the SEC disregarded our written request to refrain from trying their case in the media.” It said the commission “failed to mention that an independent team of lawyers and forensic accountants hired by Broadcom’s outside board members in 2006 thoroughly examined Broadcom’s options granting processes and filed a report with the SEC that fully exonerated Dr. Samueli.” The investigation concluded that he had “reasonably relied on management and other professionals regarding the correct option accounting treatment and grant approval process,” according to the statement. Samueli, it added, “has no accounting training and was never responsible for the processing or accounting of stock options.”

In a note to Broadcom employees, Samueli also said he had resigned as chairman and as a director, and would take a leave from the CTO post. “I could not in good conscience allow today’s unfortunate turn of events to become a distraction to the company I co-founded,” he wrote. “I will, however, continue to remain an employee of the company in the role of technology advisor to the CEO.”

Attorneys for defendants Nicholas, Ruehle, and Dull did not immediately return calls from CFO.com seeking comment.

The SEC is seeking permanent injunctions, civil monetary penalties, and officer-and-director bars against each of the individuals, disgorgement with prejudgment interest against Ruehle and Dull, and reimbursement of bonuses and profits from stock sales from Nicholas and Ruehle under Section 304 of the Sarbanes-Oxley Act of 2002.

Last month, Broadcom agreed to pay $12 million to settle SEC 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.

In March, 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.

Tullos agreed to pay more than $1.3 million in disgorgement and prejudgment interest, offsetting the value to her of exercisable stock options that Broadcom later cancelled. Without admitting to or denying the allegations in the complaint, she also agreed to pay a civil penalty of $100,000, and she will be enjoined from violations of an antifraud provision and other federal securities laws related to reporting and record-keeping.

Ruehle resigned in September 2006. Broadcom subsequently said that he stood to lose as much as $33 million after the company canceled his options to purchase more than 1.8 million shares of Class A common stock with six different grant dates going back as far as Nov. 3, 1998.