/ 6 June 2008

Broadcom ex-CEO indicted over drug parties, options

Broadcom’s former CEO took cocaine and spiked customers’ drinks with Ecstasy while also directing a criminal stock-options backdating conspiracy that cost the microchip company $2,2-billion, federal indictments released on Thursday charged.

Former chief executive and company co-founder Henry Nicholas III also hired prostitutes for himself and others and then used pay-offs or threatened violence to keep the conduct secret, one federal indictment alleges.

The charges come on top of a broader probe into one of the biggest stock-option backdating scandals among many that rocked corporate America when they started surfacing two years ago.

Failing to properly account for the valuable back-dated options from 1999 to 2005, Nicholas and other executives kept secret costs that could have dragged down high-flying stock prices, the government argues. Attorneys argued the parties with drugs and prostitutes were intended to win business.

Nicholas (48) sold more than $1-billion of company stock during the backdating scheme, and still holds more than $300-million worth. Former chief financial officer William Ruehle (66) also indicted, was given options worth millions of dollars when they were granted, court papers say.

Ruehle’s attorney said in a statement his client was innocent, and Nicholas’s attorney, Gregory Craig, said in court his client would prevail against the charges.

The defendants appeared separately before US Magistrate Judge Arthur Nakazato, Ruehle standing straight in a suit and tie, Nicholas sitting relaxed in an open-collared shirt and nodding as both were granted multimillion-dollar bail.

Nicholas was ordered to home detention, potentially at an alcohol and drug rehabilitation clinic where he now resides.

Nakazato said he was not a flight risk since he had not run during the investigation. ”If you do flee, I am going to issue an arrest warrant and I am going to send the marshal service to hunt you down,” he added.

Marijuana smoke in cockpit
The two indictments cover dozens of pages.

Prosecutors argue Nicholas stocked a warehouse with drugs and electronics for parties. A pilot flying Nicholas and friends between Orange County and Las Vegas in 2001 once had to wear an oxygen mask to avoid marijuana smoke, the papers said.

Based in the quiet, conservative Orange County city of Irvine, Broadcom is one of Southern California’s top technology firms, making microchips for everything from Apple iPhones to networking equipment.

Nicholas, a microchip engineer, founded it out of his home in 1991 with former PhD adviser Henry Samueli. A decade later, Nicholas was getting itemised receipts for drugs and having his assistant buy as much as $10 000 of narcotics for him, the government charges.

Started with $5 000 from each founder, Broadcom is now worth nearly $13-billion. But in 2007 it restated financial results and took more than $2,2-billion in charges for additional compensation expenses of options given to employees with manipulated dates in order to maximize their value.

The company in April agreed to pay $12-million to settle US Securities and Exchange Commission backdating charges, while last month the SEC filed civil charges against Nicholas, Samueli, Ruehle and General Counsel David Dull.

Thursday’s 21-count backdating indictment charges Nicholas and Ruehle with fraud and false statements. A four-charge narcotics indictment charges Nicholas with obtaining and distributing drugs.

”The drug case seems to be a lot stronger. There are many acts alleged in that indictment that would require the government to have first-hand-witness accounts,” said former federal prosector Dan Margolis, a white-collar defence lawyer.

As for the backdating charges, ”In those cases there is more of a possibility for arguing that ‘I was not fully familiar with the accounting guidance’,” he said.

Ruehle’s attorney, Richard Marmaro, called the issue an inadvertent ”technical accounting error”. ”This is a classic case of government overreaching,” Marmaro said in a statement.

Shares of Broadcom closed 2,3% higher at $28,75. – Reuters