Wall Street’s reaction to last week’s options tally by Broadcom Corp.: a $2.2 billion closing of a chapter.
Investors and analysts took the massive bill for restating past option grants as a sign the Irvine chipmaker has turned another corner on the wilder days of its youth.
“What you’ve seen over the last few days, even the last few months, the picture that emerges is one of stability,” UBS analyst Alex Gauna said.
Broadcom’s options ordeal is far from over. Still looming are probes by the Securities and Exchange Commission and U.S. Attorney’s office, as well as shareholder lawsuits.
But Wall Street largely welcomed Broadcom’s own finding that current executives had little or no part in the misdating of options for instant gain.
Cofounder, Chairman and Chief Technical Officer Henry Samueli was “involved in the flawed option granting” but wasn’t faulted since he relied on others for accounting, the company said.
Chief Executive Scott McGregor had no involvement.
Instead, the company placed most of the blame for the practice on cofounder and former chief executive Henry “Nick” Nicholas and ex-financial chief Bill Ruehle.
“Nobody in the company is in significant fault and the financials are in order,” Cathay Financial analyst Suji de Silva said. “When you have these internal probes, you want the outcome to be benign, and that’s what it was.”
Market Reaction
Broadcom’s shares rose about 5% in the days after the options tally came out, helped by two analyst upgrades and positive technology sector news.
The $2.2 billion in added charges to restated earnings for 1998 to 2005 ended up being about 50% higher than Broadcom first expected. Even that didn’t put off Wall Street.
The company had warned the bill could come in beyond expectations, analysts said.
Broadcom declined to speak about last week’s announcement.
In federal filings, a board committee said Nicholas “bears significant responsibility for the lack of adequate controls in the option granting process due to the tone and style of doing business he set.”
Nicholas did not personally benefit from the dating of options, it said.
During the late 1990s, Nicholas personified a brash, aggressive style that wasn’t out of place during the tech boom.
Nicholas’ lawyer, John W. Spiegel, said the former leader did well by the company.
“As CEO, Dr. Nicholas guided the company to record-setting growth and an unprecedented level of employee stock ownership,” Spiegel said in a statement. “This resulted in stock option grants that in hindsight should have been accounted for differently. The audit committee found that he did not personally benefit, did not knowingly engage in selecting grant dates after the fact, and sought advice from appropriate persons regarding the process for option grants.”
Along with Nicholas, Broadcom’s audit committee singled out Ruehle and former human resources chief Nancy Tullos. They bear “a substantial measure of responsibility for the lack of adequate controls and appropriate documentation in the option granting process,” according to the company’s Securities and Exchange Commission filing.
The SEC and federal prosecutors declined to comment on their looks into Broadcom’s options.
SEC’s Cox
In Irvine last week, SEC Chairman Christopher Cox said the commission’s focus is less on punitive action and more on correcting the course for the future.
“What is colloquially known as backdating runs the gamut from inadvertent mistakes to egregious fraud,” Cox said. “What the SEC is interested in stamping out is intentional fraud that undermines financial reporting and often speaks directly to the integrity of management.”
The chairman declined to specifically address Broadcom.
If Broadcom or its former executives escape federal action, the company still stands to see legal costs from shareholder lawsuits.
“Even though the SEC has said the pressure may be off for a company that has figured out what the problem is and cleaned that up they may still be under pressure from other constituency,” said Amanda Paracuellos, a corporate transaction attorney in the Irvine office of Crowell & Moring.
Reporter Jessica C. Lee contributed to this story.
