The former CFO and CEO of Broadcom Corporation have been indicted by a federal grand jury in California on securities fraud and conspiracy charges related to backdating stock options that caused the company to take a $2.2 billion write-down in 2007. The restatement is reported to be the largest accounting charge taken in connection with an options backdating case.
The one-time finance chief William J. Ruehle, 66, and his former boss, chief executive Henry T. Nicholas, 47, were charged with concealing, understating, and mischaracterized compensation expenses tied to the grants, according to the indictment that was brought in U.S. District Court in Orange County California, last week.
In a separate indictment, Nicholas was taken into custody on drug charges, that police say involved a “warehouse” of cocaine and the CEO slipping Ecstasy into the drinks of other executives. Furthermore, in May, Nicholas, Ruehle and others were charged by the Securities and Exchange Commission for violating securities law.
The current U.S. attorney’s indictments, unsealed on Thursday, allege that between 1999 and 2005, Ruehle, Nicholas, and other Broadcom managers, conspired to backdate stock option grants by selecting grant dates in the past — when the stock price had been lower than the current market price — which gave the options immediate value (putting them “in-the-money”.) In addition, the CFO and Nicholas are charged with making false claims to Broadcom’s independent auditor, Ernst & Young, and falsifying documents filed with the SEC, including the company’s Form 10-Ks, Form 10-Qs, and proxy statements.
“Bill Ruehle is innocent of the charges in the indictment, and he looks forward to the opportunity to clear his good name in a court of law, said Ruehle’s attorney, Richard Marmaro. The defense attorney continued: “At all times, Bill acted in good faith and believed Broadcom’s financial statements were accurate … This is a classic case of government overreaching. The government’s indictment unsuccessfully attempts to transform a company’s technical accounting error into criminal conduct.
Nicholas’ attorney, Gregory Craig, did not immediately return CFO.com’s phone call seeking comment. However, in a widely reported statement, Craig said that Nicholas was innocent and would fight the charges. “It’s a kitchen-sink attack on Dr. Nicholas. They’re trying to throw everything at him from eight years ago,” Craig said, according to the Associated Press.
The indictment detailed several alleged schemes focused on backdating stock options, one involving what is known as a “focal” grant process. Introduced at Broadcom in 2000, the focal grant revamped the older practice of issuing options to individual employees on the anniversary of their date of hire. Instead, the new program distributed stock option to all employees in the company at one time. The options were issued on a performance basis according to a “matrix” developed by management. In addition, the market value of the grants and change to the distribution program needed to be vetted and approved by the board’s options committee to garner favorable accounting treatment.