For many, it’s the biggest story since, well, Broadcom Corp.’s 1998 blockbuster public offering and ensuing stock run-up.
Technology and legal types are abuzz over federal fraud and drug charges against Broadcom cofounder Henry Nicholas, who is scheduled to be arraigned today in Santa Ana.
The indictment unsealed on June 5,actually two indictments, including one that delves into charges of drug use and other unseemly behavior,has led many to reflect on Nicholas’ time during Broadcom’s heyday and the charges he now faces.
The indictment has spurred talk in technology and legal circles, as well as at restaurant tables and water coolers.
While many are chatting about the case, no one interviewed by the Business Journal wanted to speak on the record about it, given the sensitivity of it or their own ties to chipmaker Broadcom.
Privately, some are reluctant to lay blame on Nicholas for what prosecutors allege was his lead role in backdating stock options grants from 1998 to 2003. In early 2007, Broadcom took charges of $2.2 billion to past earnings to correct misdated options.
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Cofounder Samueli with wife Susan: he stepped down as chairman, still technology adviser |
Nicholas, known as “Nick,” has his defenders.
“No one I know is bashing Nick,” said one source close to the company during the Nicholas era. “The people who have been around that long have a certain feeling about Broadcom that’s hard to beat. He was a leader and put OC on the map in high-tech.”
Part of the allure of the company during its go-go days in the late 1990s and early 2000s was like “being with a great, popular rock band,” the source said.
Nicholas’ extreme behavior,calling 2 a.m. meetings and working 18-hour days,were part of the culture.
“Did he work 24-7 and did he have amped up behavior? Yes,” the source said. “But everybody did. It was all about the work. Employees stayed late because they loved it. It was a thrilling time.”
The source likened Nicholas’ years as chief executive to “the Clinton administration.”
“It’s not about Nick or what he did or whatever,” the source said. “It’s like Bill Clinton. I didn’t care about his wildness. But it was the best administration they’ve ever had.”
Critics
There are just as many critics.
Chief among them are prosecutors in the U.S. Attorney’s Office in Santa Ana.
In their indictments, they paint a picture of a chief executive who allegedly spiked drinks of customers, paid a former Broadcom worker to keep quiet about his drug use and led a “fraudulent scheme and conspiracy” in-volving stock options.
Executives at rival chip companies charge that Broadcom’s stock options, which offset lower salaries, created an unfair advantage in attracting top engineers, penalizing those who played by the rules.
Others say Nicholas is the fall guy for the options fiasco, in which some 150 companies were probed for misdated grants. Including Broadcom, only a handful of indictments or convictions have resulted. Others have seen fines.
“When a U.S. Attorney’s Office and the SEC really invest their time, they want something to show for it,” said one corporate lawyer who’s following the case.
“Somebody’s head is going to roll,” said the source familiar with Broadcom. “This is an opinion I share with many,Nick is the fall guy.”
Some lawyers think Nicholas was overcharged.
“This is the government’s ‘kitchen sink’ approach,” said a local securities and business litigation lawyer. “I think that means there haven’t been good relations between the Nicholas camp and the government.”
The lawyer, who’s represented companies on options backdating cases, cites the case of San Jose-based Brocade Communications Corp.
In January, former chief executive Greg Reyes was sentenced to 21 months in prison and a $15 million fine for his role in options backdating at the company.
“I thought the Brocade case was a travesty,” the lawyer said. “It was largely overreaching by the government. I don’t feel differently about this one.”
Some legal experts were surprised by the combination of drug and fraud charges.
“It looks like a witch hunt,” said another local lawyer who’s following the case. “If it didn’t have the name Nicholas, it doesn’t look like a case the U.S. Attorney’s Office would bring to light. The reason they did it that way is to ensure that those acts by Nicholas will be in the public’s eye. It will make him look bad in front of the jury.”
The lawyer said he doesn’t think the drug charges will come up in a stock options trial.
“What distinguishes this case is you have that separate narcotics indictment, which is kind of inexplicable,” he said. “I can’t imagine a judge admitting drug charges as evidence in a stock options case.”
Fighting Charges
Nicholas plans to fight the charges, according to one of his lawyers.
But he still could strike a deal in which some drug charges could be dropped in exchange for pleading guilty to financial fraud allegations.
So far, the Nicholas case hasn’t had a big, material impact on Broadcom, where he left in 2003.
In April, the options issue did prompt cofounder Henry Samueli to step down as chairman and general counsel David Dull to take a leave of absence.
They’re both under investigation in the government’s probe.
Still, Wall Street hasn’t blinked at what many investors and analysts consider a sideshow for a company that’s changed dramatically from its early days.
“I don’t think there will be any severe effects because the criminal and SEC investigations are old,” one lawyer said. “It’s been fully priced into the market.”
Some Fallout
But industry watchers say Broadcom could see some fallout, including a potential indictment of Samueli who remains as a technology adviser to Chief Executive Scott McGregor, who’s untouched by the options issue.
“The likelihood of Samueli being indicted is still present,” the lawyer said. “It’s possible that the Samueli camp is actually talking to the government while the Nicholas camp isn’t.”
Sympathy for Samueli, one of the county’s biggest philanthropists, is widespread. Whatever happens to him, some feel he could end up regaining his community stature.
More shareholder suits could be the biggest worry for Broadcom, which earlier this year paid $12 million to settle Securities and Exchange Commission civil charges.
“You will probably see other plaintiff’s lawsuits that say the company was being mismanaged,” one lawyer said. “But Broadcom isn’t exactly doing poorly,it’s not bankrupt.”
