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Suit Alleges Broadcom Deception

Courts: Irvine firm denies shareholders' contention that shady accounting disguised the full cost of acquisitions.

March 06, 2001|KAREN ALEXANDER | TIMES STAFF WRITER

Shareholders filed a federal lawsuit Monday against Broadcom Corp., alleging that the Irvine communications chip maker deceived investors in accounting for five acquisitions last year.

The lawsuit, which seeks status as a class action, contends that the company's accounting method amounted to a scheme to increase sales figures and to "keep the stock price high so as to make acquisitions less costly."

The company denied any wrongdoing. "We believe the lawsuit is without merit," spokesman Bill Blanning said. "Broadcom will vigorously defend itself."

The lawsuit was filed in U.S. District Court in Santa Ana on behalf of investors who bought Broadcom stock between Oct. 18 and Feb. 26. It names Broadcom co-founders Henry T. Nicholas III and Henry Samueli along with William Ruehle, the chief financial officer, as defendants.

Broadcom has acknowledged that in the course of five of its 12 acquisitions last year, it arranged for warrants to be issued to customers to lock in future sales.

Immediately before buying the privately held companies, Broadcom said it encouraged them to issue their customers warrants--promises to sell stock for less than a penny a share--in exchange for commitments to continue buying their products.

Those warrants converted to warrants for Broadcom stock at the close of the acquisitions, and Broadcom accounted for them as so-called goodwill, the amount of the purchase price exceeding the value of the companies acquired. Goodwill is treated as an asset to be written off over time.

But critics have charged that the arrangement enabled the customers to buy Broadcom products at a deep discount. The lawsuit contends that the costs of those warrants were not adequately reflected in Broadcom's financial statements, where they should have been used to reduce revenue.

"Defendants knew that the actual purpose of the transactions was to grant discounts using its equity, but defendants used form over substance to keep the discounts off Broadcom's income statement," the lawsuit alleges.

The complaint contends that the three executives sold some of their shares at allegedly inflated prices, a total of $45.8 million.

The case was brought on behalf of plaintiffs Deborah and Stuart Kurtz and Sekuk Global Enterprises by Milberg Weiss Bershad Hynes & Lerach in San Diego, one of the nation's major securities litigation firms for plaintiffs.

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