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O.C. tech billionaire indicted

Ex-Broadcom CEO is accused of stock fraud and supplying drugs.

June 06, 2008|E. Scott Reckard and Kim Christensen | Times Staff Writers

Somewhere in the skies between Orange County and Las Vegas, federal prosecutors say, Broadcom Corp. co-founder and hard-partying billionaire Henry T. Nicholas III gave new meaning to the term "highflying."

Winging their way to Sin City in 2001, Nicholas and his entourage generated so much marijuana smoke that it billowed into the cockpit, "requiring the pilot flying the plane to put on an oxygen mask," according to a federal grand jury indictment made public Thursday.

The indictment, issued under seal a day earlier, accused Nicholas of doling out drugs and prostitutes as part of a freewheeling lifestyle.

A second indictment accused Nicholas of manipulating stock options at Broadcom, the Irvine-based maker of computer chips used in such products as mobile phones, Apple Inc.'s iPod and Nintendo Co.'s Wii consoles.

Broadcom co-founder Henry Samueli was not charged, but was referred to as an "unindicted co-conspirator" in the stock options indictment, which identified him by his initials.

The two founded Broadcom in 1991. They are among the best-known entrepreneurs in Southern California, having helped shape Orange County's modern image as a technology magnet.

The Securities and Exchange Commission last month accused Samueli and Nicholas of backdating stock options to make them more valuable, leading Samueli to step aside as Broadcom's chairman pending resolution of the case.

Samueli, who also owns the National Hockey League's Anaheim Ducks, has denied any wrongdoing.

Nicholas, who stepped down as Broadcom's chief executive in 2003, surrendered Thursday morning to the FBI.

In a 21-count indictment, Nicholas and William J. Ruehle, 66, Broadcom's former chief financial officer, were accused of backdating millions of stock options for five years to improperly reward employees.

A second, four-count indictment names only Nicholas, 48, and alleges that he maintained homes and commercial properties in Orange County and Las Vegas for the "purpose of using and distributing controlled substances," including cocaine and methamphetamine.

Among other things, Nicholas allegedly supplied Broadcom customers with prostitutes and narcotics he sometimes referred to as "party favors." He is accused of slipping drugs into some of their drinks.

"Defendant Nicholas spiked the drinks of others with MDMA (ecstasy) without their knowledge, including . . . the drinks of technology executives and representatives who worked for Broadcom's customers," the indictment alleged. No victims were identified by name.

Lawyers for both men denied the allegations.

"Dr. Nicholas will contest these charges vigorously," his lead attorney, Brendan V. Sullivan Jr. of Washington, D.C., said in a statement. "He is confident that he will be fully vindicated."

Ruehle's lawyer, Richard Marmaro of Los Angeles, said Ruehle "looks forward to the opportunity to clear his good name in a court of law."

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Under close watch

At an afternoon hearing in U.S. District Court in Santa Ana, Nicholas sat quietly in a jury box with criminal defendants from other cases, the unbuttoned sleeves of his dress shirt pulled over his handcuffs. He occasionally scowled as his lawyers and prosecutors argued over whether he should be held without bail as a flight risk and a threat to the community.

U.S. Magistrate Judge Arthur Nakazato ordered Nicholas freed on bail of $3.4 million secured by property pledged by his mother, who was in court Thursday, and a group of friends.

Nakazato ordered that Nicholas be confined to a Malibu drug treatment facility, with electronic monitoring, and that his two private planes be disabled. He warned Nicholas that he would be arrested if he violated any terms of his release, which also stipulate random drug tests.

He and Ruehle, who also appeared in court Thursday and was freed on a $2-million bond, are to be arraigned June 16.

The indictment that names both men details a conspiracy to backdate stock options to make them worth more to employees without having to report the expense to shareholders.

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An expensive fix

To correct its books, Broadcom last year recorded $2.2 billion in previously unreported expenses -- the biggest such adjustment among the more than 200 firms whose options practices have come under scrutiny.

"By fraudulently backdating and repricing option grants, defendants and their co-conspirators deceived Broadcom's shareholders, potential shareholders and auditors as to the nature and amount Broadcom truly was compensating its employees and officers," the indictment alleged.

Stock options were routinely used to recruit or retain employees during the high-tech boom of the late 1990s.

The indictment details one such arrangement, when Nicholas in June 1999 hired an engineer identified in the indictment by his initials, M.N.

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