The government and the defense opened the first Broadcom Corp. criminal stock options backdating trial to reach a jury by pinpointing the company's eccentric chief executive officer, its unusual options granting process and a problematic former employee who threatened to become a whistleblower.
Before a packed courtroom on Friday in Santa Ana, Calif., just miles from Broadcom's headquarters in Irvine, Calif., defense attorney Richard Marmaro sought to make clear to the jury that his client, former chief financial officer William J. Ruehle, didn't even serve on the committee that granted the stock options in question.
"Bill Ruehle had no option-granting authority in this case. None," Marmaro said.
He described a stock options process rife with delays that were made worse by a "brilliant" but "administratively challenged" former chief executive officer, Henry Nicholas.
Nicholas, Broadcom's co-founder, faces related stock options backdating charges as well as narcotics charges.
Assistant U.S. Attorney Andrew Stolper of the Central District of California in turn told the jury that Ruehle and others at Broadcom, including Nicholas, sought to cover up what was going on inside the company by lying to the U.S. Securities and Exchange Commission, Broadcom investors and outside auditors. When an investor group issued a report in 2006 highlighting three separate grants of stock options with suspicious dates, for example, Ruehle announced that he was "quite comfortable with the integrity of our stock options practices" despite having discussed backdating in a series of internal e-mails.
Stolper also highlighted an alleged cover-up involving a former engineer who complained in 2000 that Broadcom executives had concealed the backdating from the SEC and outside auditors and had falsified dates on employment contracts. "This is not a case about accounting. This is not a case about business. It's a case about lying," Stolper said.
Ruehle, who was chief financial officer of the chip manufacturer until his resignation in 2006, faces charges of conspiracy to commit securities and accounting fraud, honest services mail fraud, filing false reports with the SEC and lying to accountants. During the opening statements, Ruehle, 67, displayed little emotion and took notes while seated between his lawyers.
The trial, which is expected to last two months, is the second stock options backdating trial for Marmaro, head of the West Coast SEC enforcement and white-collar defense practice at New York's Skadden, Arps, Slate, Meagher & Flom.
In an opening statement lasting nearly two hours, Marmaro told the jury that the two members of the stock options committee, Nicholas and Henry Samueli, the company's other co-founder, met regularly on Fridays to decide the dates on which the stock options would be granted to employees. Ruehle was not a member of that committee, but executives in the human resources department frequently had trouble getting Nicholas to submit his grant list, prompting Ruehle to get involved, Marmaro said.
"He was brilliant. He was a visionary," Marmaro said of Nicholas, whose picture he showed the jury several times. "But some of the things that made him a genius made him difficult to work with."
Nicholas' unorthodox management style, which often involved yelling and screaming in the office, led to numerous "delays and frustration" at Broadcom, both of which contributed to the appearance of stock options backdating, Marmaro said.
Ruehle, who is older than Nicholas, frequently had to step in to break "the logjam" of delays, he said.
Stolper reminded the jury that Ruehle, as chief financial officer, signed documents related to the stock options grants. He spent considerable time describing a former engineer, Mehrdad Nayebi, who had alleged that Broadcom executives regularly backdated employee stock options.
"Senior executives at Broadcom went into crisis mode," Stolper said. Nicholas met with Nayebi at a hotel suite in nearby Newport Beach. After five hours together, Nicholas paid Nayebi to remain silent, Stolper said.
"You'll hear what the defendant heard about the meeting at the suite," Stolper told the jury.
The case is the first of three scheduled jury trials involving Broadcom, which restated its earnings by $2.2 billion in 2006 after the backdating came to light. It was the largest restatement on record in the United States. The second trial, against Nicholas, is scheduled for early 2010. A third trial involves the narcotics charges against Nicholas.
Samueli agreed last year to plead guilty to one count of lying to the SEC. U.S. District Judge Cormac J. Carney, who is overseeing all three trials, rejected that deal, saying that it would "erode the public's trust in the fundamental fairness of our justice system" and give the impression that "justice is for sale."
In September, the 9th U.S. Circuit Court of Appeals refused to reinstated Samueli's plea deal.
Marmaro, a Los Angeles partner, also represented Gregory Reyes, the former chief executive officer of Brocade Communications Systems Inc., during his 2007 trial. A federal jury in San Francisco convicted Reyes, who was sentenced to 21 months in prison and ordered to pay a $15 million fine.
In August, the 9th Circuit overturned Reyes' conviction, finding that prosecutors engaged in misconduct during closing arguments by falsely saying that the company's financial department knew nothing about the backdating.
