Indictments Crash Down on Broadcom

A two-week slice in the life of Broadcom co-founder Henry Nicholas, according to federal prosecutors:

In an Orange County hotel room on Jan. 17, 2001, Nicholas met with Mehrdad Nayebi. This executive had been fired, yet demanded that his stock options still vest. The previous November, Nayebi’s attorney had presented Broadcom senior management with a draft complaint that alleged a range of illegal behavior relating to the backdating of stock options.

Nicholas pleaded with Nayebi not to go public. The CEO offered to have Broadcom vest approximately 85 percent of Nayebi’s shares, worth $7 million. Nayebi agreed.

Super Bowl Sunday arrived a week and a half later. To celebrate, one of Nicholas’ “co-conspirators” drafted a “ballpark budget,” which provided for 225 tablets of the drug Ecstasy. Nicholas handed out the drugs at a party in his souped-up commercial warehouse space in Laguna Niguel.

Such is the nature of two indictments (.pdf and .pdf) handed up Thursday in Orange County against Nicholas, in which the twin evils of cocaine and faulty unanimous written consents are laid bare. Also indicted on 21 counts of backdating-related crimes is former Broadcom CFO William Ruehle. He was not implicated in the drug-related indictment.

“Dr. Nicholas will contest these charges vigorously,” said his lawyer, Brendan Sullivan Jr. of Williams & Connolly. “He is confident that he will be fully vindicated.”

Both Ruehle and Nicholas are alleged to have masterminded the widespread backdating of employee stock options, a practice that led Broadcom to restate a whopping $2.2 billion in earnings. Last month, though, the SEC included former general counsel David Dull and co-founder Henry Samueli in its backdating lawsuit. That move was notable because the company’s internal investigation, led by Kaye Scholer’s Jeffrey Gordon, gave those two executives a pass.

Prosecutors, however, detailed actions by unindicted co-conspirator “H.S.” throughout the backdating indictment. Yet Dull is not mentioned at all. Asked why the Justice Department left out Dull and Samueli from its lineup of charged individuals, Los Angeles U.S. attorney spokesman Thom Mrozek said only: “It’s an ongoing investigation.”

Former HR chief Nancy Tullos was also fingered by Kaye Scholer’s report. She pleaded guilty to obstruction in January, and she is cooperating with prosecutors.

As Broadcom’s share price declined in 2001, Nicholas hit on a scheme to compensate top managers: They would be granted additional options if they orally agreed not to exercise certain previously awarded grants. The deal would be kept from Ernst & Young auditors.

But Ruehle didn’t like the idea, according to the indictment.

“If we get too cute E&Y will blow the whistle on our whole program,” Ruehle allegedly told Tullos. Plus, another executive might talk. “In the unlikely event we have someone in our midst with [Nayebi]-like tendencies, we’re screwed.”

The indictment continues: “Ruehle instructed Tullos to convey to Nicholas his ‘serious reservations about killing the golden goose.’”

Prosecutors allege Ruehle personally selected favorable past grant dates from a list of closing stock prices. His attorney, Richard Marmaro of Skadden, Arps, Slate, Meagher & Flom, said Ruehle was innocent.

“This is a classic case of government overreaching,” he said in a statement. “The government’s indictment unsuccessfully attempts to transform a company’s technical accounting error into criminal conduct.”