Stock options backdating scandal
In March 2006, a report by the Center for Financial Research and Analysis identified Broadcom as one of 17 companies "at risk" for having back-dated stock options grants between 1997 and 2002.[12] On May 18, 2006, amid media reports about options practices, Broadcom said it had started an internal review of its stock options grants.[13] On June 12, 2006, Broadcom announced it had received a "request for information" from the U.S. Securities and Exchange Commission (SEC), and that it might soon be the subject of an informal inquiry.[12]
On July 14, 2006, Broadcom estimated it would have to subtract $750 million from earnings due to stock options irregularities. On September 8, 2006, the company announced the amount was at least $1.5 billion, "and could be substantially more."[14][13] On December 18, 2006, the SEC opened a formal investigation of Broadcom's options practices.[15][16] On January 24, 2007, Broadcom announced a restatement of its financial results from 1998 to 2005 to include a total of $2.24 billion-worth of expenses related to stock option-based compensation.[17] The grants remained the subject of the formal inquiry by the SEC, and an informal inquiry by federal prosecutors.[17]
In between March and May 2008, the SEC announced charges against Broadcom for fraudulently backdating stock options for nearly five years, from June 1998 to May 2003.[18] In its complaint, the SEC alleged that Broadcom's top officers at the time had misrepresented the dates on which stock options were granted to executives and employees. In describing the scheme, the SEC said: "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."[18]
On May 15, 2008, Broadcom co-founder and CTO Henry Samueli resigned as chairman of the board, and took a leave of absence as Chief Technology Officer. On June 5, 2008, Broadcom co-founder and former CEO Henry Nicholas and former CFO William Ruehle were indicted on charges of illegal stock-option backdating. Nicholas was also indicted for violations of federal narcotics laws.[19] However, in December 2009, federal judge Cormac J. Carney threw out the options backdating charges against Nicholas and Ruehle because of prosecutorial misconduct, after finding that federal prosecutors improperly tried to prevent three defense witnesses from testifying.[20][21]
In 2008, the U.S. Securities and Exchange Commission (SEC) charged executives of Broadcom with fraudulently backdating stock options. Through the scheme, company executives allegedly avoided reporting $2.22 billion in compensation expenses. The company also allegedly overstated its income by between 15% and 422%, and understated its loss by between 16% and 38%, according to the SEC.[22] A judge dismissed the charges against company executives Henry Nicholas and Henry Samueli, citing witness intimidation on the part of prosecutors. The judge also dismissed charges against chief financial officer William Ruehle.[23] In the end, the company had to pay $160M to settle with the SEC.[24]
