An SEC news release said the executives of the Irvine, California-based Broadcom conducted a “five-year systematic scheme to secretly backdate stock options granted to virtually all Broadcom officers and employees.” Regulators charged that Broadcom’s former chief executive officer Henry T. Nicholas, chairman and chief technology officer Henry Samueli, former chief financial officer William J. Ruehle, and general counsel David Dull were involved in the scheme from 1998 to 2003.
The scheme to fraudulently backdate stock option grants led the firm to fail to record billions of dollars of compensation expenses and falsify documents to further the fraud, the SEC said. As a result of the scheme, Broadcom restated its financial results in January 2007 and reported more than $2 billion in additional compensation expenses.
“As alleged in the complaint, the executives at Broadcom perpetrated a massive, five-year scheme that involved fraudulent backdating of dozens of option grants, falsifying corporate records, intentionally false accounting, and lying to shareholders,” said Linda Chatman Thomsen, Director of the SEC’s Division of Enforcement, in the news release. “This egregious misconduct resulted in the largest accounting restatement to date arising from stock option backdating and warrants the significant sanctions sought from these individuals.”
The SEC alleged that the four defendants made it appear that the options were granted at times corresponding to low points of the closing price of Broadcom’s stock – despite the fact that the purported grant date bore no relation to when the grant was actually approved.
This resulted in artificially and fraudulently low exercise prices for those options. The SEC also alleges that the unrecorded compensation expenses and hidden backdating practices led Broadcom to provide false and misleading disclosures to Broadcom’s shareholders in filings with the SEC through 2005, the SEC announcement said.
Broadcom’s Options Committee
The complaint says Broadcom’s option committee approved as many as 88 grants during the relevant period, but for many of the grants, the committee neither held meetings nor made decisions on the dates the grants were supposedly approved. Instead, Ruehle allegedly selected most of the grant dates retroactively based on a comparison of Broadcom’s historical stock prices and Nicholas and Samueli allegedly concealed the backdating by signing false committee written consents stating that the grant had been approved “as of” the retroactive date.
The SEC also said Ruehle and Dull each personally benefited from the backdating scheme by receiving and exercising backdated grants that were in-the-money by more than $100,000 for Ruehle and $1.8 million for Dull.
Previously, the Commission brought enforcement actions against Broadcom (See Broadcom to Pay $12M to Settle Options Backdating Charges ) and Broadcom’s former vice president of human resources, Nancy M. Tullos (See Broadcom Ex-Exec Pleads Guilty in Options Probe ), in connection with the option backdating scheme.