The Broadcom Option Backdating Case: Raising More Questions Than It Settles

Yesterday, the SEC filed a settled enforcement action. Normally, a settled case ends matters. This settlement however, raises more questions than it resolves.

The SEC filed its long-anticipated action against Broadcom Corp., SEC v. Broadcom Corp., Civil Action No. SACV 08-00430 JVS (C.D. Cal. April 22, 2008). The Commission’s complaint, much of which has been previously reported, detailed a five year option backdating scheme. The authority over those grants was held, according to the complaint, by a two-person committee composed of the company’s Chairman and Chief Technology Officer and its former CEO. While the committee approved 88 grants, frequently there was no meeting or decision by the committee on the dates those grants supposedly were approved. Rather, Broadcom’s former CFO allegedly selected many of the dates retroactively and matched them to historical stock prices. The committee however, executed consents which stated that the grants had been approved “as of” a prior date. Broadcom’s general counsel directed the preparation of what the complaint calls false board and compensation committee consents.

To resolve the case, the company consented to the entry of an injunction prohibiting future violations of the antifraud, books and records and proxy provisions of the federal securities laws. The company also agreed to pay a civil penalty of $12 million.

Broadcom settles the action as to the company and returns the SEC’s backdating cases to the standards used in the initial cases such as Reyes – intentional conduct. In view of the allegations of false documents and cover-ups it is still an open question however as to whether the SEC will continue to use this standard to resolve its inventory of cases or return to the negligence standard used in SEC v. Maxim Integrated Pds., Inc., Civil Action No. C-07-65121 (N.D. Cal. Dec. 4, 2007) against the CEO of that company, Mr. Gifford.

There are other key liability questions. As the Commission’s Release on the case makes clear, its investigation is continuing. Key questions involve the potential criminal and civil executives such as company founder Henry T. Nicholas III, Henry Samueli and others. Although Mr. Nicholas did not receive any of the backdated options, he sat on the committee cited in the SEC’s complaint. He was also mentioned, along with Henry Samueli, as an “unindicted potential co-conspirator” in the plea to obstruction of justice by former Broadcom H.R. executive Nancy M. Tullos. Also unresolved is the question of civil and perhaps criminal liability for Broadcom’s general counsel whose conduct is cited in the complaint and perhaps other executives. Overall, the not unexpected resolution of this case raises more questions than it solves.