Correction: The story has been updated to clarify that the insurance companies for Broadcom have agreed to pay the settlement, rather than Broadcom itself.
Insurance companies for Broadcom Corp. have agreed to pay $118 million to settle allegations of stock options backdating, in one of the largest such deals in a derivative action to date.
The proposed settlement, subject to approval by U.S. District Judge Manuel Real of the Central District of California, would be the second largest in a derivative action involving stock options backdating, according to lead plaintiffs counsel Richard Heimann, name partner at San Francisco's .
The largest, reached in 2007 between several pension funds and former executives of UnitedHealth Group Inc., was worth an estimated $900 million.
"It is significantly beyond in terms of actual dollar value what most if not all the derivative cases have settled for," Heimann said of the Broadcom deal. "The restatement in this instance was well in excess of $2 billion, meaning they had understated expenses and overstated revenues for a five-year period of that amount."
The proposed deal, which was filed in court on Friday, involved several current and former officers and directors of Broadcom, including former general counsel David Dull.
Shareholders had contended that the individual defendants manipulated Broadcom's stock options from 1997 to 2007 to enrich themselves and that Broadcom issued false and misleading statements to the U.S. Securities and Exchange Commission. Broadcom was forced to restate its earnings downward by $2.2 billion.
Under the proposed terms, the defendants denied wrongdoing. Daniel Lefler, a partner at Irell & Manella in Los Angeles who represents nominal defendant Broadcom, current president chief executive Scott McGregor and two other individual defendants, declined comment. So did Terry Bird, a principal at Bird, Marella, Boxer, Wolpert, Nessim, Drooks & Lincenberg in Los Angeles, who represents Broadcom's special litigation committee; and Dull's attorney, Seth Aronson, chairman of the securities litigation practice at O'Melveny & Myers. Lawyers for the other individual defendants either declined to comment or did not return calls.
The $118 million will be paid for by directors and officers liability insurance coverage, according to court documents. Another $11.5 million will be paid in plaintiffs' attorney fees and expenses.
The deal, if approved, would stay shareholder claims in a related class action against Broadcom pending the criminal trials of former chief financial officer William Ruehle and co-founder and former chief executive Henry Nicholas. Federal prosecutors last year filed criminal counts against Ruehle and Nicholas related to stock options backdating. Nicholas also faces federal drug charges.
Thomas Dubbs, a senior partner at New York's Labaton Sucharow and lead counsel in the consolidated shareholder class action against Broadcom, declined to comment.
The proposed civil settlement excludes Nicholas, Ruehle and co-founder Henry Samueli.
"The reason that we are not settling with any of the three individuals is because they were unwilling to come up with enough to settle the case," Heimann said. "In other words, to put it differently, the money funding the settlement that's in hand is coming from insurance carriers. I was unwilling to settle the case against any of the other individuals unless they came up with personal contributions."
Ruehle, who faces criminal trial this fall, is contesting the government's appeal to the 9th U.S. Circuit Court of Appeals over discovery requests that he claims are protected by the attorney-client privilege. Specifically, he claims that his lawyers at Irell & Manella lacked permission to give the government statements he made during Broadcom's internal investigation of the backdating and "reasonably understood" would remain confidential.
In April, U.S. District Judge Cormac J. Carney of the Central District of California referred Irell & Manella to the State Bar of California for "ethical misconduct," concluding that the firm's lawyers failed to warn Ruehle of a potential conflict in representing him.
Irell has countered that Ruehle, who has since replaced his attorneys, knew that his statements were not confidential.
Oral argument is scheduled for today in Pasadena, Calif. The next day, on Wednesday, a separate panel plans to hear oral arguments regarding a rejected plea deal between Samueli and federal prosecutors.
Samueli, who has not been indicted, agreed last year to plead guilty to making a false statement to the SEC regarding his role in the backdated stock options. Carney rejected the deal, which he said would give the perception that "justice is for sale." Samueli would have served five years' probation under the proposed agreement and paid a $250,000 fine, plus $12 million to the U.S. Treasury.
In Re Broadcom Corp. Derivative Litig., No. 2:06-cv-03252 (C.D. Calif.)