Broadcom co-founder indicted

Fraud, sex, drug charges detailed in 21 counts

June 06, 2008|By E. Scott Reckard and Kim Christensen

A federal grand jury has indicted Henry T. Nicholas III on fraud charges, according to documents unsealed yesterday that also accuse the California billionaire of supplying customers with prostitutes and drugs and slipping Ecstacy into the drinks of unwitting technology executives.

In a 21-count indictment, Nicholas and former Broadcom Corp. Chief Financial Officer William J. Ruehle were charged with backdating millions of stock options for five years to improperly reward employees of the Irvine, Calif.-based computer chip maker Nicholas co-founded.

A second indictment naming only Nicholas accused him of maintaining homes and commercial properties in Orange County, Calif., and Las Vegas for the "purpose of using and distributing controlled substances" he sometimes referred to as "party favors."

"Defendant Nicholas spiked the drinks of others with MDMA [ecstacy] without their knowledge, including ... the drinks of technology executives and representatives who worked for Broadcom's customers," the indictment alleged without identifying the victims.

The indictment detailed episodes in which Nicholas allegedly used and distributed illicit drugs, including cocaine and methamphetamines. On a flight from Orange County to Las Vegas aboard a private plane, the government alleges, Nicholas used and distributed drugs, "causing marijuana smoke to enter the cockpit and requiring the pilot flying the plane to put on an oxygen mask."

Nicholas, who stepped down as Broadcom's chief executive in 2003, surrendered to the FBI yesterday morning, said Pete Norell, a supervising FBI special agent in Santa Ana, Calif.

After a three-hour hearing yesterday, U.S. Magistrate Arthur Nakazato ordered Nicholas released on $3.3 million bail. Nakaza also ordered random weapons searches and drug tests by the government, home detention, electronic monitoring and the disabling of Nicholas' two private planes.

Nicholas, 48, in handcuffs and wearing gray slacks and a white shirt with no tie or belt, nodded vigorously when asked if he agreed to the conditions of release.

An arraignment hearing was set for June 16. Nicholas did not enter a plea.

The first indictment detailed a conspiracy to backdate stock options to make them worth more to employees without having to report the expense to shareholders.

To correct its books, Broadcom recorded $2.2 billion last year in previously unreported expenses - the biggest charge by the more than 200 firms whose options practices have come under scrutiny.

"By fraudulently backdating and repricing option grants, defendants and their co-conspirators deceived Broadcom's shareholders, potential shareholders and auditors as to the nature and amount Broadcom truly was compensating its employees and officers," the indictment alleged.

"Dr. Nicholas will contest these charges vigorously," Nicholas' lead attorney, Brendan V. Sullivan Jr. of Washington, said in a statement. "He is confident that he will be fully vindicated."

Ruehle's lawyer, Richard Marmaro of Los Angeles, said Ruehle "looks forward to the opportunity to clear his good name in a court of law."

Marmaro said Ruehle relied on the advice of Broadcom's auditors in operating the stock option program. He characterized the backdating problems as accounting glitches with no intent to defraud shareholders or mislead financial analysts.

"This is a classic case of government overreaching," Marmaro said in a statement. "The government's indictment unsuccessfully attempts to transform a company's technical accounting error into criminal conduct."

In the separate drug indictment, Nicholas is alleged to have used death threats and payoffs to conceal his "unlawful conduct." In June 2002, he reached a $1 million "settlement agreement" with an unnamed Broadcom employee who knew about his alleged illegal drug activity, according to the indictment.

It lists three California properties described in previous Los Angeles Times reports about Nicholas' alleged indulgences in drugs and prostitutes:

*An equestrian estate in Laguna Hills, where Nicholas had constructed a warren of tunnels and underground rooms, including one that contractors alleged was intended to become a secret "sex lair."

*A warehouse-office complex in nearby Laguna Niguel, which contractors said was used for the same purposes and nicknamed "The Ponderosa."

*A Newport Coast residence where Nicholas was trying to start a record company and where rock groups frequently visited.

In a civil lawsuit seeking back wages, former Nicholas aide Kenji Kato contended that this home also was the scene of frequent use of drugs and prostitutes.

The options charges, handed up Wednesday by a federal grand jury in Santa Ana, were similar to a Securities and Exchange Commission lawsuit filed last month. The SEC suit accused Nicholas and Ruehle, along with Broadcom co-founder Henry Samueli and the company's former general counsel, David Dull, of backdating stock options.

Samueli and Dull were not named in the indictment unsealed yesterday, although the government could still seek to charge them later.

Samueli, a philanthropist and the owner of the Anaheim Ducks hockey team, is a former engineering professor of Nicholas. The two founded Broadcom in 1991, with Nicholas serving as chief executive and Samueli as chairman.

E. Scott Reckard and Kim Christensen write for the Los Angeles Times. The Associated Press contributed to this article.

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