U.S. SECURITIES AND EXCHANGE COMMISSION
Litigation Release No. 20574 / May 14, 2008
Accounting and Auditing Enforcement Release No. 2827 / May 14, 2008
Securities and Exchange Commission v. Henry T. Nicholas III, Henry Samueli, William J. Ruehle, and David Dull,, United States District Court for the Central District of California, Civil Action No. SACV 08-539 CJC (RNBx)
SEC Charges Four Current and Former Broadcom Officers for Backdating OptionsThe Securities and Exchange Commission today charged two current and two former top officers of Irvine, Calif.-based Broadcom Corporation for their alleged participation in a five-year systematic scheme to secretly backdate stock options granted to virtually all Broadcom officers and employees.
The SEC's complaint, filed in federal district court for the Central District of California, alleges that Broadcom's former chief executive officer Henry T. Nicholas, chairman and chief technology officer Henry Samueli, former chief financial officer William J. Ruehle, and general counsel David Dull perpetrated a scheme from 1998 to 2003 to fraudulently backdate stock option grants, failing to record billions of dollars of compensation expenses and falsifying documents to further the fraud. As a result of the scheme, Broadcom restated its financial results in January 2007 and reported more than $2 billion in additional compensation expenses. The SEC alleges that, through this scheme, the four officers 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. The SEC also alleges that the unrecorded compensation expenses and hidden backdating practices led Broadcom to provide false and misleading disclosures to Broadcom's shareholders in filings with the SEC through 2005.
According to the SEC's complaint, Nicholas and Samueli served on the two-member option committee that had authority to approve options to employees and all but the most senior officers, 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 the grants the committee neither held meetings nor made decisions on the dates the grants were supposedly approved. Instead, Ruehle allegedly selected most of the grant dates retroactively based on a comparison of Broadcom's historical stock prices, and Nicholas and Samueli allegedly concealed the backdating by signing false committee written consents stating that the grant had been approved "as of" the retroactive date.
In addition, the SEC alleges that Nicholas, Samueli, and Ruehle - not the compensation committee - decided on option grants to Broadcom's senior officers and used hindsight to select the dates for them. Dull allegedly knew about and participated in the backdating scheme and was involved in the preparation, review, and approval of false board and compensation committee meeting documents to conceal two backdated grants in 2001, one of which awarded him options to purchase 300,000 shares. The SEC is alleging that Ruehle and Dull each personally benefited from the backdating scheme by receiving and exercising backdated grants that were in-the-money by more than $100,000 for Ruehle and $1.8 million for Dull.
The SEC's complaint alleges that Nicholas, Samueli, Ruehle and Dull violated Section 17(a) of the Securities Act of 1933 ("Securities Act"), Sections 10(b) and 13(b)(5) of the Securities Exchange Act of 1934 ("Exchange Act"), and Rules 10b-5 and 13b2-1 thereunder, and aided and abetted Broadcom's violations of Sections 13(a), 13(b)(2)(A) and 13(b)(2)(B) of the Exchange Act and Rules 12b-20, 13a-1 and 13a-13 thereunder. In addition, the SEC alleges that: (i) Nicholas, Ruehle, and Dull violated Section 14(a) of the Exchange Act and Rule 14a-9 thereunder; (ii) Nicholas and Ruehle violated Rules 13a-14 and 13b2-2 of the Exchange Act; (iii) Ruehle and Dull violated Section 16(a) and Rules 13a-11 and 16a-3 of the Exchange Act; and (iv) Dull aided and abetted Broadcom's violations of Section 10(b) of the Exchange Act and Rule 10b-5 thereunder. The SEC is seeking permanent injunctions, civil monetary penalties, and officer-and-director bars against each of the individuals, disgorgement with prejudgment interest against Ruehle and Dull, and reimbursement of bonuses and profits from stock sales from Nicholas and Ruehle pursuant to Section 304 of the Sarbanes-Oxley Act of 2002.
Previously, the Commission brought enforcement actions against Broadcom (see Litigation Release No. 20532 (April 22, 2008)) and Broadcom's former vice president of human resources, Nancy M. Tullos (see Litigation Release No. 20476 (March 4, 2008)), in connection with the option backdating scheme. The Commission's investigation in this matter is continuing.
The Commission acknowledges the assistance of the U.S. Attorney's Office for the Central District of California and the Federal Bureau of Investigation.