Suit Against Broadcom Faces Uphill Battle
By ANDREW SIMONS
The vast majority of shareholder lawsuits get settled. Even with those odds, the case of some well-known Orange County investors against Broadcom Corp. starts out with an uphill fight.
Last week, a federal judge dismissed a similar suit saying he saw no evidence that Broadcom executives conspired to defraud investors. U.S. District Court Judge Gary Taylor left open the door for investors to refile their suit but was blunt in his dismissal.
“Plantiffs do not indicate how defendants were aware or how that awareness influenced company decisions,” Taylor wrote.
Broadcom’s attorney, Dan Tyukody, said he’s emboldened by the company’s showing in federal court.
“The (new) lawsuit is grounded in the same factual allegations as the federal one,” he said. “At the end of the day, the result will be the same,” he predicted.
A lawyer for the OC investors said he believes the group has a better chance because their claim is filed in state court.
“Otherwise we wouldn’t have filed it,” said Adam Miller, an attorney for the investors.
The case is pitting high-powered OC businesspeople against each other. Big legal names also are squaring off: one of the two firms representing the OC investors, Los Angeles-based Girardi & Keese, worked on the Erin Brockovich case. The Los Angeles office of Brobeck, Phleger & Harrison LLP is representing Broadcom.
The suit, filed in Orange County Superior Court last month, alleges officials at the Irvine chipmaker boosted sales and profits by improperly accounting for expenses.
That allowed co-founders Henry Nicholas and Henry Samueli and financial chief William Reuhle to cash in on an artificially inflated stock price, they argue.
The suit centers on how Broadcom accounted for warrants issued to customers of companies it acquired in return for their business. Broadcom accounted for the warrants as goodwill, a special charge, rather than discounts or rebates, which would count against revenue.
The warrant issue came to light in a Wall Street Journal article last year. Amid a probe by the Securities and Exchange Commission, Broadcom restated its earnings but admitted no wrongdoing.
The restatements lowered fourth-quarter 2000 revenue by 10% but also cut the company’s third-quarter 2000 net loss by 3 cents a share.
Broadcom officials have called both the lawsuits frivolous, saying they will “vigorously” fight them.
In the federal dismissal, the judge didn’t rule on the accounting practices, saying even if there were signs of irregularities there was no evidence of fraud.
“The publication of inaccurate accounting figures or failure to follow (generally accepted accounting principles) without more, does not establish (knowledge) in a securities fraud claim,” he wrote.
“The judge took great pains to point out that even if Broadcom had committed a wrong, he didn’t see enough evidence,” said Don Hamman, head of litigation with Newport Beach-based Stradling Yocca Carlson & Rauth, which isn’t involved in either Broadcom case.
Attorneys for investors in the federal case are expected to refile.
That the judge dismissed the suit “without prejudice”,meaning the defense can refile in 20 days with changes,makes “all the difference in the world,” according to lawyer Miller.
Whatever the outcome of the federal suit, the investors in the state suit feel confident, Miller said.
The investors believe they will receive more favorable treatment in a state court than in a federal venue. Recent changes in federal law restrict “discovery”,the ability of plaintiffs to subpoena documents and interview company officials under oath in preparing for trial.
“There’s too much evidence out there, I believe, to show Broadcom absolutely engaged in this kind of conduct and that there’s clear evidence they did violate securities laws,” Miller said.
The latest suit also comes three months after many of the same plaintiffs filed suit against Derek Clark, a Newport Beach-based broker for JP Morgan Chase & Co.
That suit alleges Clark encouraged the investors to buy Broadcom stock even as Broadcom officials,many of which Clark and JP Morgan trade for,sold hundreds of thousands of shares. Miller also is involved in that suit, which is in arbitration.
