Risk Management

Judge: Ex-Broadcom CFO, CEO Must Face Charges

Former CFO Ruehle and former CEO Nicholas lose argument that an increase in the stock price after a restatement made their alleged false statements...
Stephen TaubDecember 16, 2008

A judge ruled that Broadcom’s former chief financial officer and chief executive officer both must face charges in the company’s stock option backdating scandal.

Ex-CEO Henry Nicholas and ex-CFO William Ruehle were accused of illegally backdating stock options, causing the chipmaker to restate $2.22 billion in earnings.

“Defendants argue that because the price of Broadcom stock increased when Broadcom announced its restatement, the alleged false statements and alleged facts of concealment are immaterial as a matter of law,” said U.S. District Judge Cormac J. Carney, according to the wire service report. “This argument fails because materiality is a question of fact that must be decided by a jury.”

The two accused former executives sought to throw out the 21 charges brought against them. Bloomberg said Judge Carney agreed in part to one of the defendants’ requests, for access to certain grand jury records.

Nicholas and Ruehle pled not guilty in June to committing fraud. Ruehle faces 21 counts, and is accused of filing false statements with the SEC, committing wire fraud, and falsely certifying financial reports. He is free on a bond of $2.6 million. Nicholas, who pleaded not guilty to 25 counts contained in two indictments, faces 21 chargest in one indictment, alleging improper accounting for stock-option backdating at the microchip maker. Nicholas faces separate drug charges, including allegations that he spiked the drinks of Broadcom clients with the hallucinogen ecstasy, Bloomberg noted.

Nancy Tullos, former Broadcom vice president of human resources, earlier this year pled guilty to obstruction of justice in exchange for her cooperation.

Last month, Nicholas’ former wife accused him of squandering $60 million from their fortune on personal indulgences, including a $3.1-million limousine bill, and making misguided investments that have left her so cash-poor she can’t pay her tax bill, according to the Los Angeles Times. Stacey Nicholas also alleged in a probate court petition that her former husband repeatedly threatened her physically during a long harassment campaign, once whispering in her ear that he would have her “whacked.”

According to the paper, she also claimed that her ex-husband spent $1 million on detectives who tailed her, their three children, and her boyfriend as far as Europe, and once “stalked [her] in gorilla masks and cameras outside a coffee shop when she was with a girlfriend.”

In other backdating-case news, Gary A. Ray, former head of human resources at homebuilder KB Home, agreed to plead guilty to being part of a conspiracy to obstruct an investigation into stock option backdating at the company. According to the Associatd Press, court documents show that Ray admitted that he and the chief executive in 2006 submitted false information on KB’s option granting practices to the company’s audit committee with the intent to obstruct an investigation by the Securities and Exchange Commission.

Bruce Karatz was KB’s chairman and chief executive in 2006, but Ray’s plea documents do not refer to Karatz by name, the wire service said. Two years ago, KB Home said in a regulatory filing an internal investigation had found that Karatz and Ray “selected grant dates under the company’s stock option plans.”

Karatz retired as chairman, CEO, and director, and Ray was fired, the homebuilder said in a regulatory filing at the time. In addition, Richard B. Hirst resigned as executive vice president and chief legal officer. After an investigation into past options practices, a subcommittee of the audit and compliance committee and its independent legal counsel concluded that the homebuilder used incorrect measurement dates for financial reporting purposes for annual stock option grants from 1998 to 2005.