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Broadcom Options Case Disintegrates

A federal judge has crippled the U.S. government's options-backdating cases against former Broadcom Corp. (Nasdaq: BRCM) executives, and the federal drug case against former CEO Henry Nicholas III could fall apart next.

Yesterday, U.S. District Court Judge Cormac J. Carney acquitted former Broadcom CFO William Ruehle of fraud charges and dismissed criminal fraud charges against Nicholas.

He also dismissed a Securities and Exchange Commission (SEC) case against four Broadcom executives: Nicolas; Ruehle; former CTO Henry Samueli; and former general counsel David Dull. Civil charges were filed in that case in May 2008. (See Options Scandal Deepens at Broadcom.)

Carney ruled that prosecutors had improperly meddled with the executives' defense by intimidating potential witnesses -- specifically, Samueli, Dull, and former Broadcom vice president of human resources Nancy Tullos. As a result, reports say, Carney didn't think Nicholas and Ruehle could get fair trials.

Last week, Carney also tossed out Samueli's guilty plea from June 2008. That plea came with a $12.2 million fine and five years of probation, but also with a promise that Samueli wouldn't have to testify against Nicholas; the two men are longtime friends who founded Broadcom together. (See Broadcom: Guilty Plea.)

The Orange County Register describes a courtroom scene made for TV: Nicholas and Samueli, who hadn't spoken in years due to the ongoing court cases, hugging in the aisle after Carney's ruling.

The dismissals might affect the government's case against Nicholas for drug distribution. Reports say Carney double-dared prosecutors (so to speak) to come up with reasons why that case shouldn't be thrown out, considering Nicholas's defense would rely on the same set of witnesses as the options case.

For government prosecutors, it's an embarrassing end to a high-profile case. In 2007, Broadcom had to restate $2.2 billion in on-paper earnings after it was revealed that the company hadn't properly accounted for backdated stock options. (See Broadcom's $2.2B Confession.)

Options backdating isn't illegal, but many, many companies weren't properly accounting for the costs of those options.

Another high-profile options case that went to trial was that of Gregory Reyes, former Brocade Communications Systems Inc. (Nasdaq: BRCD) CEO. Reyes's conviction got overturned in August. (See Brocade Ruling Gets Erased.)

Earlier this month, however, prosecutors confirmed that they'll give it another go.

The court rulings gave Broadcom something extra to talk about at its annual analyst meeting, held yesterday in Santa Clara, Calif.

Broadcom used the occasion to announce a better forecast for fourth-quarter earnings. (See Broadcom Brightens Q4 Outlook.)

CFO Eric Brandt joked during his afternoon presentation that it would have been nice to have gotten the court decisions earlier; apparently, Broadcom's operating expenses have been hard to predict due to legal fees.

Broadcom now says fourth-quarter revenues will be around $1.32 billion, as opposed to the $1.25 billion previously announced, and that gross margins on its product sales will be better than expected. Broadcom stock traded roughly flat after-hours.

— Craig Matsumoto, West Coast Editor, Light Reading

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