Washington, D.C., May 14, 2008 (Lawfuel) – The Securities and Exchange Commission today charged two current and two former top officers of Irvine, Calif.-based Broadcom Corporation for their alleged participation in a five-year systematic scheme to secretly backdate stock options granted to virtually all Broadcom officers and employees.
The SEC’s complaint, filed in federal district court for the Central District of California, alleges that Broadcom’s former chief executive officer Henry T. Nicholas, chairman and chief technology officer Henry Samueli, former chief financial officer William J. Ruehle, and general counsel David Dull perpetrated a scheme from 1998 to 2003 to fraudulently backdate stock option grants, failing to record billions of dollars of compensation expenses and falsifying documents to further the fraud. As a result of the scheme, Broadcom restated its financial results in January 2007 and reported more than $2 billion in additional compensation expenses.
“As alleged in the complaint, the executives at Broadcom perpetrated a massive, five-year scheme that involved fraudulent backdating of dozens of option grants, falsifying corporate records, intentionally false accounting, and lying to shareholders,” said Linda Chatman Thomsen, Director of the SEC’s Division of Enforcement. “This egregious misconduct resulted in the largest accounting restatement to date arising from stock option backdating and warrants the significant sanctions sought from these individuals.”
Rosalind R. Tyson, Acting Regional Director of the SEC’s Los Angeles Regional Office, added, “The defendants caused Broadcom to deprive its shareholders and the market of accurate information regarding executive compensation and the company’s accounting for stock options.”
The SEC alleges that, through this scheme, 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 fact that the purported grant date bore no relation to when the grant was actually approved. This resulted in artificially and fraudulently low exercise prices for those options. The SEC also alleges 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’s complaint, 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.
In addition, the SEC alleges that Nicholas, Samueli, and Ruehle – not the compensation committee – decided on option grants to Broadcom’s senior officers and used hindsight to select the dates for them. 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 is alleging 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.
The SEC is charging Nicholas, Samueli, Ruehle, and Dull with violating or aiding and abetting violations of the antifraud, record-keeping, financial reporting, and internal controls provisions of the federal securities laws. The SEC also alleges that Nicholas and Ruehle violated the proxy and false statements to auditors provisions and signed certifications required by the Sarbanes-Oxley Act of 2002 that were false and misleading concerning Broadcom’s 2002 through 2005 periodic reports. In addition, the SEC alleges that Ruehle and Dull violated the securities ownership reporting provisions. 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 pursuant to Section 304 of the Sarbanes-Oxley Act.
Previously, the Commission brought enforcement actions against Broadcom and Broadcom’s former vice president of human resources, Nancy M. Tullos, in connection with the option backdating scheme.
The Commission acknowledges the assistance of the U.S. Attorney’s Office for the Central District of California and the Federal Bureau of Investigation. The Commission’s investigation in this matter is continuing.