Broadcom’s Backdaters: The Trials of Many Tears

Options backdating is about failure of ethical leadership. And, according to a study released in August 2009, the act of uncovering and disclosing stock option backdating can lead to improvements in management and financial performance. Aren’t leaders who lie about options backdating more likely to cut other corners?  Even if their goals undermine their organizations’ financial strength? What boundaries could they be expected to have?

The reality is that ethical leadership contributes to effective and sustained business performance.

The backdating scandal consumed headlines in 2006 when the U.S. Securities and Exchange Commission (SEC) began investigating more than 140 companies, and filed civil charges against 24 companies and 66 individuals.

One of those companies was Broadcom which has since restated its financial results reporting more than $2 billion in additional compensation expenses. Broadcom settled with the SEC, agreeing to a $12 million penalty.

The first of the trials of former Broadcom executives has begun with former CFO Bill Ruehle pleading not guilty to charges he conspired to conceal and understate compensation expenses from 1999 to 2005. He is charged with 21 counts including fraud, internal control violations, false certifications, falsifying records, and lying to investigators. The SEC brought similar charges against Broadcom co-founder and former CEO Henry Nicholas, who will stand trial early next year. Nicholas, an eccentric billionaire, is also facing drug charges.

Broadcom’s other co-founder and former chairman Henry Samueli has pleaded guilty to one count of fraud and awaits sentencing. Also awaiting sentencing is the former VP of human resources who pleaded guilty to obstruction of justice. Broadcom’s former general counsel has settled with the SEC.

In opening statements the prosecutor said about Ruehle, “The defendant wanted to have employees, the best and the brightest, highly skilled engineers without showing any expense on Broadcom’s report card.” He added, “This is not a case about accounting. It is not a case about business. It is a case about lying.” However, Ruehle’s attorney argued that the case is about “unintentional misapplication of the rules.” He added that “Witness after witness will say he always tried to do the right thing.”

Emails are the currency of an individual’s words. When shown emails linking him to the options backdating,  Samueli changed his plea to guilty. In opening statements at Ruehle’s trial, the prosecutor read the jury emails from Ruehle using them to show Ruehle’s complicity in the backdating activity.

With so many former Broadcom leaders involved in the options backdating scandal, this culture of complicity  and leadership style will inevitably be on trial as well. Several former executives, including Ruehle, benefited financially from how the backdating was calculated. Ruehle’s attorney has already pointed the finger at Nicholas and his management  style.

Broadcom in 2006 at the conclusion of its internal investigation that exonerated Samueli and others still there, but didn’t address Ruehle or Nicholas who had left, said it lacked adequate controls between 1999 and 2003. The company said their record keeping and documentation were insufficient. The internal investigation also indicated that certain individuals could have done more to address inadequacies in the option granting process.

In the dance of finger pointing, Ruehle’s defense has a steep hill to climb to justify why as CFO adequate controls weren’t his responsibility, why he isn’t accountable for attesting to the accuracy of financial filings that weren’t accurate, and how the actions he took were “the right thing to do” for the company and its investors.

Ethical leadership, don’t leave home without it.

Gael O’Brien   November 2, 2009

The Week in Ethics


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