This week’s federal indictment of Broadcom Corp. cofounder Henry Nicholas was a long time coming.
It capped a year-plus probe of Nicholas that went beyond stock options at Irvine-based Broadcom and into charges of heavy drug use and allegations of bizarre personal behavior.
The indictment of Nicholas on securities fraud and drug charges ranks among the biggest stories to come out of Orange County, along with the county’s 1994 bankruptcy and the recent corruption charges indictment of former sheriff Mike Carona.
Nicholas has denied wrongdoing and plans to fight the charges, according to his lawyer.
An indictment of Nicholas was widely expected.
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Still in question is whether prosecutors also will charge Broadcom cofounder and technology adviser Henry Samueli, who recently stepped down as chairman, and David Dull, the chipmaker’s general counsel who took a leave of absence in May.
In early 2007, the chipmaker took charges of $2.2 billion to past earnings to fix misdated options,the largest restatement bill of any of the some 150 companies involved in stock options backdating.
The misdating took place from 1998 to 2003. Nicholas was chief executive from the company’s founding in the 1990s until 2003.
Federal investigators turned their attention to Broadcom in 2006 after a Merrill Lynch & Co. analyst identified the chipmaker and five other companies as having had “suspicious” options granting practices.
Two months later, a Broadcom board committee started an internal audit of options backdating at the company.
By late 2006, the Securities and Exchange Commission started its own probe.
In early 2007, the Broadcom board committee released its report with the $2.2 billion backdating bill.
Nicholas bore “significant responsibility for the lack of adequate controls in the option granting process due to the tone and the style of doing business he set,” according to the report.
It also said there was “substantial evidence” that former chief financial officer Bill Ruehle was involved in backdating. He left the company in late 2006 and was charged in the Nicholas indictment concerning options.
Cofounder Samueli served on the board committee that granted stock options with Nicholas. But Broadcom’s report said he had only passing involvement in the granting of options and “reasonably relied on management and other professionals.”
A federal criminal probe into options by the U.S. Attorney’s office in Santa Ana heated up in 2007 after prosecutors uncovered lurid allegations of drug use and other unseemly behavior by Nicholas that were aired in civil suits by a former personal employee and a contractor.
Allegations brought up in the suits appear to be part of the Nicholas indictment on drug charges.
Federal investigators were said to be interested in the suits as part of “an aggressive legal theory” as to whether Broadcom failed to disclose to investors that Nicholas’ alleged drug use hindered his ability to run the company, according to the Wall Street Journal.
Prosecutors didn’t bring up the theory in thier indictments.
In late 2007, prosecutors stuck a plea deal with former Broadcom human resources executive Nancy Tullos over options charges.
Tullos pleaded guilty to one count of obstruction of justice in the stock options probe. Tullos, who left the company in 2003, agreed to cooperate in the case.
Early this year, prosecutors for the first time cited Nicholas and Samueli as “unindicted potential co-conspirators” in the Tullos plea.
In March, Tullos agreed to pay more than $1.3 million to settle civil charges with the SEC.
A month later, Broadcom paid $12 million to settle a civil suit by the SEC, without admitting or denying wrongdoing in the options issue.
The issue escalated last month after Broadcom for the first time acknowledged in an SEC filing that prosecutors were weighing criminal indictments of Nicholas, Samueli, Dull and Ruehle.
In mid-May, the four men were sued by the SEC over misdated options.
The suit alleges that Nicholas, Samueli, Dull and Ruehle “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.”
Shortly after, Samueli stepped down as chairman and took a leave of absence as the chipmaker’s technology chief, though he’s still an adviser to Chief Executive Scott McGregor, who’s untouched by the options issue.
So far, Wall Street hasn’t balked at the legal drama over Broadcom options.
Most investors are more concerned with growth of the company’s chips for cell phones, networking gear, consumer electronics and computers.
Broadcom’s stock was off slightly last week on a recent market value of about $15 billion.