Orange County Business Journal
By Sarah Tolkoff
January 4, 2010

A federal drug case against Broadcom Corp. cofounder Henry “Nick” Nicholas that spurred lurid stories of an underground lair and drink spiking could end with a whimper next month.

On Feb. 2, prosecutors are set to go before a judge in Santa Ana to argue why Nicholas still should be tried on drug charges after a stock options fraud case against him was thrown out last month for prosecutorial misconduct.

Many following the legal drama said the drug case is a tall order for the government’s lawyers after U.S. District Judge Cormac J. Carney dealt them decimating blows in their cases against former Broadcom executives.

“Judge Carney appears to be signaling to the prosecutors that they should seriously consider dismissing the drug charges,” said Wayne Gross, partner in the litigation practice at Greenberg Traurig LLP in Irvine and former head of the U.S. Attorney’s Office in Santa Ana, which has led the prosecution of Nicholas and other former Broadcom executives.

Without the options case against Nicholas, the drug case doesn’t hold a lot of weight, according to H. Dean Steward, a San Clemente criminal defense lawyer known for his work in federal cases.

“The drug case was nothing more than an effort to continue to put pressure on Nicholas, perhaps to enter a plea or cooperate against the others” in the options cases, he said.

Nicholas had a reputation as a hard charging, hard partying executive. Before and after his indictment, a video and an e-mail surfaced that appeared to link him to drug use. Even so, lawyers called it unusual for prosecutors to bring federal charges, something usually reserved for the biggest drug cases.

Charges

Nicholas is charged with four counts of distributing cocaine, Ecstasy and other drugs to friends and business associates.

The government’s indictment alleges Nicholas provided drugs and prostitutes to Broadcom customers and slipped some customers drugs in their drinks.

Nicholas has pleaded not guilty to the charges.

His drug case defense team, headed by John Potter of Quinn Emanuel Urquhart Oliver & Hedges LLP in San Francisco, declined to comment for this story.

The drug charges are a result of a probe into options backdating at Irvine-based chipmaker Broadcom.

In early 2007, Broadcom restated several years of financial results to reflect $2.2 billion in charges for misdated stock options.

Nicholas, Broadcom’s former chief executive who left in 2003, and former chief financial officer Bill Ruehle were charged with misleading shareholders by falsifying grant dates for employee options.

Cofounder and former chairman Henry Samueli pleaded guilty to one count of lying to Securities and Exchange Commission investigators in a plea deal with prosecutors.

In a stunning move last month, Judge Carney dismissed the options cases of Nicholas, Ruehle and Samueli because of alleged misconduct by Assistant U.S. Attorney Andrew Stolper and a lack of evidence that the executives violated securities laws or profited from backdated options.

Stolper is accused of inappropriate contact with lawyers for former Broadcom general counsel David Dull and for leaking information about the cases to the media.

In his ruling, Carney made a not-so-veiled threat that more misconduct allegations could emerge in Nicholas’ drug case.

“Scheduling a special hearing to make the government establish why it should be entitled to proceed is telling in itself,” Gross said. “Even more telling is his ominous reference to new and different prosecutorial misconduct evidence that would be introduced should the government proceed.”

Possibilities

Prosecutors could seek to strike a plea deal with Nicholas that brings probation in the drug case in exchange for them dropping an appeal of the options dismissal, said John Hueston, a former U.S. Attorney now with the Newport Beach office of Irell & Manella LLP.

But Nicholas is unlikely to strike any deal before going before Carney, who could dismiss the drug case outright.

There is a remote chance prosecutors could try to appeal the dismissal of Nicholas’ options case, lawyers said.

An appeal potentially could help the beaten-down prosecutors “save face,” according to Gross.

“Not appealing is almost an admission that the judge got it right with respect to both the merits of the case and the prosecutorial misconduct,” Gross said. “It conveys to the world that they weren’t dead wrong. They are cognizant of the fact that people are watching and that they will interpret their action or inaction accordingly.”

Others see the government throwing in the towel.

“The government does not want anything else to do with the Broadcom case,” Hueston said.

Defense lawyer Steward, himself the son of a former federal prosecutor, said he sees the government closing the books on its botched Broadcom prosecutions.

“This has just been a disaster for them for the past few months,” he said “The only way it can go away is with the passage of time. My prediction is that they won’t appeal the options case and that they will drop the drug case and try to move on.”