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Broadcom founders accused of fraud

Samueli steps down as chairman amid stock backdating allegations.

May 15, 2008|E. Scott Reckard, Kim Christensen and Helene Elliott | Times Staff Writers

Seeking the best and brightest during the tech boom, Broadcom Corp. founders Henry T. Nicholas III and Henry Samueli tossed out millions of stock options to attract and reward favored employees, whose Porsches and Lamborghinis gleamed in the parking lot as they worked late into the night.

On Wednesday, federal regulators accused the Orange County billionaires of manipulating the options illegally for five years. Hours later, Samueli stepped down as chairman and chief technical officer of the Irvine chip maker.

"I could not in good conscience allow today's unfortunate turn of events to become a distraction to the company I co-founded," Samueli, a major philanthropist and owner of the Anaheim Ducks NHL team, said in a statement.

Nicholas, who quit as chief executive in May 2003, could not be reached, and his lawyer declined to comment. In mid-April, Nicholas checked into the Betty Ford Center for an alcohol treatment program.

In a lawsuit filed Wednesday, the Securities and Exchange Commission accused Samueli and Nicholas of systematically backdating 232 million options to make them more valuable, then hiding the fact from other shareholders. The suit, filed in federal court in Santa Ana, said the fraud involved as many as 88 options grants.

The SEC named as defendants two other key players in Broadcom's ascent to the giddy height of success during the dot-com boom: former Chief Financial Officer William J. Ruehle and current General Counsel David A. Dull.

All four have denied that they acted improperly. Samueli's lawyer lashed out at the SEC, accusing the regulators of "trying their case in the media."

Samueli, in an e-mail to "my colleagues and friends at Broadcom," said it would be "inappropriate" for him to continue on the board and as an officer while the SEC case was pending.

"I will, however, continue to remain an employee of the company in the role of technology advisor to the CEO," he said. "I also remain fully committed to pursuing energetically my family philanthropic endeavors as well as our other family business activities including the Anaheim Ducks."

The SEC seeks to bar all four from ever serving as officers or directors of public companies. It also demands that Ruehle and Dull return "ill gotten gains" of $100,000 and $1.8 million, respectively, and that Nicholas and Ruehle repay unspecified bonuses and stock sale profits.

Nicholas and Samueli, who formed a two-man committee that awarded 95% of the options, never received any backdated options themselves.

But the SEC suit said that as "a result of the misconduct of Nicholas, Samueli, Ruehle and Dull, Broadcom's books and records falsely and inaccurately reflected, among other things, the dates of option grants, the company's stock-based compensation expenses, the company's operating results, and at least one employee's hire date."

Because of the alleged fraud, Broadcom restated its financial results in January 2007 and reported more than $2.2 billion in additional compensation expenses. It was the biggest restatement among 250 companies that have reported possible problems with stock option grants.

The complaint follows Broadcom's agreement April 22 to pay $12 million to settle an earlier SEC lawsuit that made similar allegations, but against the company itself. That suit alleged that the backdating scheme ran from June 1998 through May 2003, a time of "tremendous growth" for the company. Federal prosecutors also have identified Samueli and Nicholas as "potential co-conspirators" in an ongoing criminal investigation. The SEC's lawsuit does not preclude a separate action by the Justice Department.

Anil Puri, dean of the College of Business and Economics at Cal State Fullerton, said the SEC lawsuit and possible criminal charges "could be quite damaging" to Broadcom, which he described as well respected in the industry.

"Henry Samueli is the key person driving the company, the key person in the creation of the company and the running of the company," Puri said. "If such a key individual had to step down, it would have a major impact on the future performance of the company."

Samueli attorney Gordon Greenberg said his client had relied on "management and other professionals" to ensure that options were granted properly.

"The SEC press release failed to mention that an independent team of lawyers and forensic accountants hired by Broadcom's outside board members in 2006 thoroughly examined Broadcom's options granting processes and filed a report with the SEC that fully exonerated Dr. Samueli," Greenberg said in a statement.

Broadcom makes computer chips used in Apple Inc.'s iPods, mobile phone headsets and Nintendo Co.'s Wii game console.

Like many other technology companies, it had used stock options as a way to attract talent and build employee loyalty while conserving cash. Indeed, it capped salaries at $110,000 a year for most employees -- far less than they could have made at competitors -- while providing them with some of the richest options packages.

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