Tuesday, January 23, 2007

Put On a Happy Face at Broadcom

Broadcom Corp. announced the largest restatement to date due to options-timing issues, totaling $2.2 billion, due to inadequate documentation covering the first five years in which it was publicly traded.  In the typically bland terms describing such decisions, Broadcom's 10-K (here) states:

From our initial public offering through May 2003, Broadcom’s option grant processes and procedures were not formalized or consistently followed . . . The Equity Award Committee did not conduct formal meetings with respect to all option grants; rather, the committee members often held informal discussions, either in person or telephonically, to determine whether option grants should be approved and priced as of that day. The Equity Award Committee members conferred frequently (often weekly) during 1998 and 1999. From 2000 through 2002, the Equity Award Committee members conferred less frequently and sometimes made option grants only once a quarter. No formal, contemporaneous written records of the Equity Award Committee discussions or meetings were kept. Instead, the Equity Award Committee relied upon, and option grant approvals were documented by, unanimous written consents, which were dated “as of” a specified date but were generally prepared after that date and signed at a later time. Thus, Broadcom has been unable to locate affirmative, contemporaneous documentation of Equity Award Committee meetings related to many past option grants.

The responsibility is put largely at the feet of co-founder and former CEO Henry T. Nicholas, III, but the company is quick to exonerate him and other CEOs by noting that none of them personally gained from the options awards.  A press release (here) stresses, "No option grant requiring a measurement date revision was awarded to Broadcom's co-founders (Henry Samueli and Henry T. Nicholas III), either of the Chief Executive Officers who succeeded Dr. Nicholas (Alan E. Ross and Scott A. McGregor), or any current or former member of the Board of Directors."  The Nicholas Family Trust owns over 36 million shares, so Nicholas had little need to enrich himself further on company options.  The size of the restatement and apparent involvement of a former CEO in the timing decisions is likely to draw even further interest from prosecutors and the SEC. (ph)

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