The Orange County Register
By Rachanee Srisavasdi, Larry Welborn and Michael Mello
December 16, 2009

A federal judge today dismissed securities fraud charges against the two remaining Broadcom Corp. defendants, ruling that a prosecutor committed misconduct by improperly attempting to intimidate defendants and witnesses.

U.S. District Judge Cormac J. Carney acquitted Broadcom’s former chief financial officer, William Ruehle, and dismissed charges against Henry T. Nicholas III, the company’s co-founder.

The ruling follows Carney’s decision last week to toss out a guilty plea and criminal charge against Henry T. Samueli, Broadcom’s other co-founder.

The judge said prosecutorial misconduct compromised the integrity of the case.

“I have a solemn obligation to hold the government to the Constitution. I am doing nothing more and nothing less,” Carney said.

Ruehle and Nicholas had been charged with participating in a conspiracy to inflate Broadcom’s earnings by failing to report the backdating of stock options granted to employees. Samueli had admitted lying to the Securities and Exchange Commission.

Ruehle had been on trial since October. The jury in his case was due to hear closing arguments on Thursday.

“To submit this case to the jury would make a mockery of Mr. Ruehle’s constitutional right to compulsory process and a fair trial,” Carney said.

The government cannot appeal Carney’s acquittal of Ruehle. Carney also dismissed the Nicholas fraud case “with prejudice,” which means the government can’t bring the same charges again.

“I always had hope and confidence that the truth would come out in the end, and as the trial progressed (and) I heard what the judge was saying, I had more confidence,” Ruehle said afterward. “Obviously, we are really happy.”

As the half-hour hearing adjourned, Nicholas and Samueli found each other in the aisle. They hadn’t talked in years because of the government’s case against them.

“Nick, give me a hug,” Samueli said.

The men, with tears in their eyes, hugged for about a minute. Nicholas gushed, “Oh my God! Oh My God!” as he patted his former business partner on the back.

Carney set a Feb. 2 hearing on separate drug-distribution charges against Nicholas. He said prosecutors will need to convince him why he shouldn’t dismiss that case too.

The same witnesses Carney determined had been improperly influenced by the government – Samueli, former Broadcom general counsel David Dull, and former vice president of human resources Nancy Tullos – would also be witnesses in that case, he explained.

Carney also said there was evidence of government misconduct against Nicholas, such as prosecutors’ threat to issue a grand jury subpoena to Nicholas’ 13-year-old son “and force the boy to testify against his father.”

Nicholas said that he was “deeply grateful” for the judge’s decisions to dismiss the cases faced by Ruehle, Samueli and himself.

“Judge Carney’s decision today has reaffirmed my belief and faith in the justice system,” he said in a statement.

Wayne Gross, a former federal prosecutor in Orange County who now does defense work, said that “between now and the February hearing,” the government is likely “to seriously consider waving the white flag” in Nicholas’s drug case.

Outside the courtroom, Samueli called Carney’s ruling “the ultimate vindication” for the defendants and Broadcom, which he said had been “smeared and hurt” by the case.

The collapse of the government’s case against Broadcom was due, in the judge’s mind, to the conduct of federal prosecutor Andrew Stolper – who had become the recent focus of Ruehle’s trial.

Carney gave Dull – an alleged unindicted co-conspirator – full immunity from prosecution after determining Stolper committed misconduct when talking with Dull’s attorneys.

He also found fault with Stolper for leaking to a Los Angeles reporter in 2007 that Samueli failed to cooperate with federal investigators. Such leaks are against the policy of the U.S. Attorney’s Office.

The judge said the government’s treatment of Samueli was “shameful,” describing it as a “campaign of intimidation and misconduct” intended to bring him down.

Acting U.S. Attorney George Cardona responded that the government respectfully disagreed with the judge’s ruling.

“I don’t think that will come as a surprise … I hope you understand we disagree,” Cardona told the judge.

Stolper’s actions are the subject of an investigation by the U.S. Department of Justice’s Office of Professional Responsibility, according to a court filing.

The Broadcom case – the first options-backdating prosecution to go to trial in Southern California – is the most recent example of the difficulty faced by federal prosecutors in going after executives for backdating.

A federal appeals court in August overturned the 2007 conviction of Gregory L. Reyes, the former chief executive of Brocade Communications, on charges related to backdating and granted him a new trial. Richard Marmaro, Ruehle’s lawyer, defended Reyes and will represent him at a retrial, scheduled for February.

Still pending is the prosecution of Bruce E. Karatz, the former chairman and chief executive of KB Home who was accused in March 2009 of awarding himself and other KB executives millions of dollars in undisclosed stock-based compensation as part of an alleged options backdating scheme. His trial is scheduled for February.

Peter J. Henning, a law professor at Wayne State University Law School in Detroit, said the Broadcom case shows the pressure prosecutors are under in these cases to prove criminal intent.

“These cases push the outer edge of what is fraud,” said Henning, an expert in white-collar crime. “These aren’t theft cases. If someone steals money, it isn’t hard to figure out the crime. … There is no question they cut corners. What they were doing was not proper … but whether it was a crime, that’s another question.”

Broadcom, which was founded in 1991, attracted employees by offering generous stock options – the right to purchase a share of stock in the company at a fixed price – while paying lower salaries.

Backdating – which means recording the granting and effective date of an option retrospectively – is not illegal but must be reported to shareholders and regulators.

Ruehle was accused of conspiring with other executives, including Nicholas, to hide backdating from stockholders and regulators. Broadcom was forced to reduce its earnings by $2.2 billion because of the backdating – the largest restatement of any company facing a federal investigation.

Broadcom President and Chief Executive Scott McGregor said in a statement that Carney’s decision removes “an issue that, for some observers, may have partially obscured Broadcom’s tremendous business successes.”

Broadcom conducted an internal investigation into the backdating, which faulted Nicholas, Ruehle and Tullos, who testified as a government witness in Ruehle’s trial.

Tullos’ future is unclear. She had pleaded guilty to one count of obstruction of justice for ordering a subordinate to delete an e-mail about backdating.

Besides dismissing the criminal options-backdating cases, Carney also dismissed the Securities and Exchange Commission’s lawsuit.

The commission had sued Nicholas, Samueli, Ruehle and Dull in May 2008. The lawsuit was stayed pending resolution of the criminal case.

Carney said the SEC has 30 days to re-file an amended complaint, though he said he “discouraged” such action.

Molly White, an SEC spokeswoman, declined to comment.