Securities Law Prof Blog

Editor: Eric C. Chaffee
Univ. of Toledo College of Law

Tuesday, April 22, 2008

SEC and Broadcom Settle Backdating Charges

The SEC settled charges against Broadcom Corporation for falsifying its reported income by backdating stock option grants over a five-year period.  As a result of the fraud, Broadcom restated its financial results in January 2007 and reported more than $2 billion in additional compensation expenses. The Irvine, Calif.-based semiconductor maker has agreed to settle the charges and consented to pay a $12 million penalty.  Linda Chatman Thomsen, Director of the SEC's Division of Enforcement, said that "The scope and magnitude of the fraud warrants the significant penalty imposed on the company."

In a complaint filed in the U.S. District Court for the Central District of California, the SEC alleges that from June 1998 to May 2003, Broadcom misrepresented the dates on which stock options were granted to executives and employees. Broadcom's Chairman and Chief Technology Officer along with its former CEO sat on the two-member option committee with authority to approve options to employees and all but the most senior executives, whose grants were to be decided by two independent directors comprising Broadcom's compensation committee.

The SEC alleges that the option committee approved as many as 88 grants during the relevant period, but for many of these grants there was no meeting or decision made by the committee on the dates the grants were supposedly approved. Instead, Broadcom's former CFO allegedly selected many of the grant dates retroactively based on a comparison of Broadcom's historical stock prices, and the two option committee members allegedly concealed the backdating by signing false committee written consents stating that the grant had been approved "as of" the retroactive date. According to the complaint, Broadcom's General Counsel directed the preparation of false board and compensation committee written consents to conceal some of these grants.

The SEC further alleges that, as a result of the backdating scheme, Broadcom avoided reporting $2.22 billion in compensation expenses during the relevant period. Broadcom overstated its income by between 15 percent and 422 percent, and understated its loss by between 16 percent and 38 percent. Without admitting or denying the SEC's allegations, Broadcom agreed to settle the charges by consenting to a permanent injunction against further violations of the antifraud, record-keeping, financial reporting, internal controls, and proxy provisions of the federal securities laws, and payment of the $12 million penalty. The settlement is subject to approval by the court.

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