U.S. SECURITIES AND EXCHANGE COMMISSION
Litigation Release No. 20532 / April 22, 2008
Accounting and Auditing Enforcement Release No. 2811 / April 22, 2008
Securities and Exchange Commission v. Broadcom Corp., United States District Court for the Central District of California, Civil Action No. SACV 08-00430 JVS (RNBx)
Broadcom to Pay $12 Million Penalty to Settle Charges for Fraudulent Stock Option Backdating
The Securities and Exchange Commission today filed a civil fraud action against California-based semiconductor maker Broadcom Corporation for falsifying its reported income by backdating stock option grants from 1998 to 2003. As a result of the fraud, Broadcom restated its financial results in January 2007 and reported more than $2 billion in additional compensation expenses. Broadcom has agreed to settle the matter by consenting to pay a $12 million civil penalty and be permanently enjoined.
In a complaint filed in the Central District of California, the SEC alleges that from June 1998 to May 2003, Broadcom, acting through its top officers, backdated the dates on which stock options were granted to executives and employees. Broadcom's Chairman and Chief Technology Officer and its former CEO sat on the two-member option committee that had authority to approve options to employees and all but the most senior executives, whose grants were to be decided by two independent directors comprising Broadcom's compensation committee.
The SEC alleges that the option committee approved as many as 88 grants during the relevant period, but for many of these grants there was no meeting or decision made by the committee on the dates the grants were supposedly approved. Instead, Broadcom's former CFO allegedly selected many of the grant dates retroactively based on a comparison of Broadcom's historical stock prices, and the two option committee members allegedly concealed the backdating by signing false committee written consents stating that the grant had been approved "as of" the retroactive date. Through backdating, Broadcom 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. In addition, the complaint alleges that the top officers — not the compensation committee — decided on option grants to Broadcom's executives and used hindsight to select the dates for them. According to the complaint, Broadcom's general counsel directed the preparation of false board and compensation committee consents to conceal some of these grants.
The SEC further alleges that, as a result of the backdating scheme, Broadcom avoided reporting $2.22 billion in compensation expenses during the relevant period and thus overstated its income from between 15% to 422% and understated its loss from between 16% to 38%. The unrecorded compensation expenses and hidden backdating practices led Broadcom to provide false and misleading disclosures to its shareholders in filings with the SEC through 2005.
Without admitting or denying the SEC's allegations, Broadcom has agreed to settle the charges by consenting to a permanent injunction against further violations of Section 17(a) of the Securities Act of 1933 and Sections 10(b), 13(a), 13(b)(2)(A), 13(b)(2)(B), and 14(a) of the Securities Exchange Act of 1934 and Rules 10b-5, 12b-20, 13a-1, 13a-11, 13a-13, and 14a-9 thereunder. Broadcom also has agreed to pay a civil monetary penalty of $12 million.
Broadcom's settlement is subject to approval by the court.