Julie and Bill Ruehle in their home office in Carlsbad, Calif. Bill Ruehle,… (Don Bartletti, Los Angeles…)
Almost from its inception, the federal government's options backdating case against executives of Broadcom Corp. reeked of cheap melodrama more than it gleamed with truth-seeking about corporate accounting and corporate pay.
You can count Bill Ruehle, the Irvine high-tech company's chief financial officer during the period at issue, as one of the victims of the game. You should also know that Ruehle, 70, escaped with his reputation intact, and has lived to tell the whole story his way.
Ruehle was indicted in June 2008 on charges he defrauded Broadcom and its shareholders by failing to account properly for millions in stock option grants to company employees and executives. His fellow defendant was Broadcom co-founder Henry Nicholas, who was simultaneously but separately charged with a raft of lubricious misdeeds — drug use, hiring of prostitutes on a majestic scale, consumption of pot in such volume that the pilot of his personal plane supposedly had to wear an oxygen mask to keep straight.
The public and the press (including, truth be told, The Times), ate it up — right up until December 2009, when federal Judge Cormac J. Carney of Santa Ana tossed it all out for prosecutorial misconduct, also on a majestic scale.
"I think they wanted very badly to win," Ruehle told me last week, referring to the feds, "and some people go over the top in their zeal to win."
Ruehle sounds surprisingly serene about a process that placed his freedom and his reputation in jeopardy for the better part of 31/2 years, counting back to August 2006, when he first suspected that Broadcom might be setting him up as a fall guy. An angrier tone emerges from his recent self-published book, "Mr. Ruehle, You Are a Free Man: My Fight for Justice." (The title comes from Carney's final words upon tossing the case.)
In the book, Ruehle trains his anger on two targets: the federal prosecutors who trampled on his due-process rights and the paltriness of the options scandal, which he contends was ginned up by the business press and by regulators looking for easy scores. Backdating didn't involve much wrongdoing, if any, he contends, and surely didn't rise to the level of criminal activity. On the first count, Ruehle is certainly correct; on the second, maybe not so much.
The options scandal erupted in 2005, when Erik Lie, a business professor at the University of Iowa, released a paper suggesting that hundreds of companies might have backdated stock option grants to maximize the potential gains for recipients, including top executives.
When options are granted they're assigned a "strike price" at which they can be exercised, typically the stock price on the record date of the grant; when the stock rises higher than that price, the recipient can exercise the option and pocket the difference. If a grant date can be selected after the fact to establish a low strike price, the recipient can often be guaranteed a bigger score.
It's not illegal to backdate an option this way. But grants of "in the money" options — those with an embedded profit on the grant date — must be recorded on corporate reports as a charge against earnings. Typically, the backdating cases turned on failures to account for them accurately in corporate disclosures.
Lie's paper triggered an investigative frenzy. Backdating was fairly easy for the public to grasp, and the Securities and Exchange Commission and the Justice Department charged dozens of companies and executives with having failed to make the proper disclosures or falsifying corporate documents to conceal the grants' true timing.
Broadcom, a rapidly growing tech company, had salted its executives' and recruits' pay packages with millions of option grants, making it a big target for the feds. In 2007, the firm restated six years of results to reflect $2.2 billion in previously undisclosed options expenses, the biggest such restatement up to that time.
Ruehle acquired the mind-set of an innocent man whose life falls under the control of utter strangers. "As a CFO I'd always been very conscious of the need to report to investors in a clear, straightforward and wholesome way. To suddenly have all these fingers pointed at you saying, 'You're a criminal,' was frightening. The indictment read, 'United States of America v. William Ruehle' — I thought, that's 300 million to one. That doesn't sound like very good odds."
Co-workers he thought were his friends — indeed, the company he had served — were now on the other side. He had cooperated with the internal investigation conducted by Broadcom's law firm, Irell & Manella, on the assumption his conversations would be protected by attorney-client privilege, only to discover that the firm had fed the information to the prosecutors. Carney ruled it inadmissible, a first glimmer that the judge might be looking askance at the prosecution.