Connoisseurs of salacious gossip about the rich and famous must have found themselves in pig heaven in June 2008, when federal prosecutors went after the billionaire Henry T. Nicholas III.
The indictment charging that he was part of a huge stock option manipulation scheme at Broadcom Corp., the Irvine high-tech company he co-founded, was only the beginning.
The lagniappe was a second indictment related to his personal lifestyle: allegations of his purchases of illegal drugs and his hiring of prostitutes on a heroic scale, his construction of an underground drug den, his consumption of marijuana in such volume that the pilot flying Nicholas and his entourage aboard a private jet to Las Vegas had to don an oxygen mask.
A year and a half later, the whole federal case had gone to hell. Nicholas and several other executives had been freed of all charges by a federal judge outraged at the liberties the prosecutors had taken to make their case. He even threw out the cases against two defendants who had already pleaded guilty. The Securities and Exchange Commission dropped its related civil case soon afterward.
The prosecutors could have asked a higher court to reinstate the charges. Instead, they dropped their appeal, announcing the decision on the Friday of Memorial Day weekend, as though hoping no one would notice they were slinking away.
The outcome was a terrific victory for Nicholas and the other defendants, including Broadcom co-founder Henry Samueli, a philanthropist whose name is on the engineering schools at UCLA and UC Irvine.
But it's a disaster in many other ways. The reputation of federal prosecutors is deeply marred. The public, treated to the spectacle of billionaires skating on felony charges even if for perfectly good reasons, has to be more cynical about the fairness of the judicial system. And there's still the empty feeling that the defendants must have done something wrong … but what?
Now that the criminal cases are in the past, it's proper to survey the wreckage. Judge Cormac J. Carney's action is part of a trend in recent high-profile cases in which federal judges have called major fouls on federal prosecutors. And the Justice Department, under Atty. Gen. Eric Holder, has clamped down on prosecutor excesses.
Is this a bad thing? "In the post- 9/11 years, a lot of prosecutors got emboldened to go as far as they could and play as dirty as they could, figuring that no one would stop them," Bennett Gershman of Pace University law school, the author of a legal text on prosecutorial misconduct, told me. "Judges seem to have become emboldened by what they see the prosecutors doing."
In April 2009, for instance, a federal judge threw out the conviction of former Sen. Ted Stevens, (R- Alaska), after learning that prosecutors had withheld evidence in his favor. In December, another judge tossed the indictments of four Blackwater contractors in connection with a shooting incident in Iraq that took 14 lives after learning that prosecutors had relied on testimony given under grants of immunity.
The Broadcom case involved stock options, which became an important part of the pay packages of employees in high-tech companies starting in the late 1990s. The options were supposed to be valueless when issued, but profitable in the future if the company did well.
The government alleged that Nicholas, Samueli and others connived to backdate Broadcom options so that the profit was guaranteed. The value of those options should have been disclosed to shareholders but wasn't — arguably making Broadcom look more profitable than it really was.
Nicholas was traveling overseas and could not immediately be reached for comment, a spokesman said.
In any case, he and his fellow defendants aren't exactly angels. There's evidence that they knew the company's auditors might look askance at the option finaglings. And under pressure from the SEC, Broadcom in 2007 restated six years of financial results to reflect $2.2 billion in previously undisclosed options expenses, an admission that it hadn't gotten things right the first time. That was then the largest options-related restatement by a public corporation.
So it's fair to assume that the defendants knew they were sailing close to the wind. Whether they were all fully aware that their actions flouted formal accounting standards, much less that they might have been committing a federal crime, is a different story. Of hundreds of options backdating investigations earlier this decade, only a handful resulted in criminal prosecutions, generally where executives tried to cover up by lying to the feds — and the prosecutors' won-lost records in those cases is less than perfect.
Even before the Broadcom cases went to trial, defense attorneys were complaining that the prosecutors had gone way over the line.