Broadcom co-founder details company’s stock options in former CFO’s fraud trial

By Gillian Flaccus, AP
Tuesday, December 8, 2009

Broadcom co-founder takes stand in fraud trial

SANTA ANA, Calif. — The stock options that made many of Broadcom’s early employees millionaires overnight were an important part of making the chip-maker a success, co-founder Henry Samueli said Tuesday in the fraud trial of the company’s former chief financial officer.

A federal judge took the unusual step last week of granting Samueli immunity and ordering him to testify as a defense witness for former CFO William Ruehle, who is accused of backdating stock options at Broadcom Corp., one of the world’s most successful semiconductor companies. Ruehle has pleaded not guilty.

Backdating occurs when a company retroactively sets the options’ exercise price to a low point in the stock’s value to increase the recipient’s profits when the shares are sold. If the practice isn’t properly disclosed, it can allow companies to overstate their profits and underpay on taxes.

Broadcom hasn’t admitted any wrongdoing, but the computer chip maker reduced previous financial results by $2.2 billion in 2007 and agreed to pay $12 million to settle a civil complaint over the issue.

Samueli pleaded guilty last year to lying to the Securities and Exchange Commission during its investigation and is awaiting sentencing.

On Tuesday, Samueli described the heady days when Broadcom went public more than a decade ago. Broadcom had awarded its employees stock options as partial compensation for seven years, but the options had no value while the company was private.

That changed dramatically on April 17, 1998, Samueli testified.

“Seventy percent of our employees from the early days became millionaires on the day we went public, some of them many times over,” he said. “I was very proud of that because they put in a lot of very hard work to get to that point.”

The company achieved more than $1 billion in revenue by 2000 and had nearly $4.8 billion in net revenue by 2008 with 7,000 employees worldwide, Samueli testified. During that period of rapid growth, Broadcom acquired 22 companies, he said.

Samueli also described the brutal work involved in making the company a success. He said 80-hour weeks were the norm for all employees and it wasn’t uncommon to be at the office after midnight every day.

Samueli also described internal discussions at Broadcom about how to handle stock option grants to employees. He said they were regarded as key to long-term retention for talented engineers, and the company’s leadership agonized about what to do when the value of the grants plummeted in 2000 and 2001 as the high-tech bubble burst.

“Those stock options became worthless overnight,” he said. “We had a big problem at the company … in that the stock that we used to attract and retain great employees all of sudden became worthless, and what do we do about it?”

Samueli was expected to remain on the stand through Tuesday afternoon.

Samueli was to serve five years of probation and pay $12 million to the federal government for lying to the SEC, but U.S. District Judge Cormac J. Carney rejected the plea deal as too lenient and said he didn’t want the public to think the billionaire owner of the NHL’s Anaheim Ducks could buy justice. Samueli appealed the rejection and lost.

Carney is expected to sentence Samueli after Ruehle’s trial.

Samueli’s legal team, however, has asked a judge to dismiss the charge due to prosecutor misconduct, including allegations that Assistant U.S. Attorney Andrew Stolper leaked private grand jury information to the media and contacted the attorney of another defense witness about his upcoming testimony.

Stolper has declined to comment on the allegations.

Carney has said he will rule on the motion to dismiss after a verdict in Ruehle’s trial, which could last two more weeks.

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