Broadcom co-founder faces drug charges
SANTA ANA, Calif. (AP) - June 5, 2008 In a pair of indictments unsealed Thursday, the billionaire also
is accused of committing conspiracy, securities fraud and other
violations while he led the Irvine-based computer chip company.
Broadcom was eventually forced to write down its profits by $2.2
billion in January 2007, believed to be the largest-ever
restatement related to improperly accounting for backdated options.
After a three-hour hearing Thursday, U.S. Magistrate Judge
Arthur Nakazato ordered Nicholas released on $3.3 million bail. He
also ordered random weapons searches and drug tests by the
government, home detention, electronic monitoring and the disabling
of Nicholas' two private planes.
Nicholas, 48, in handcuffs and wearing gray slacks and a white
shirt with no tie or belt, nodded vigorously when asked if he
agreed to the conditions of release.
An arraignment hearing was set for June 16. Nicholas did not
enter a plea.
Attorney Gregory Craig said at a hearing that Nicholas was
innocent and would prevail.
"It's a kitchen-sink attack on Dr. Nicholas. They're trying to
throw everything at him from eight years ago," Craig said.
The indictments paint a bizarre picture of a successful
entrepreneur, who allegedly used much of his fortune to fund drug
parties in airplanes and luxury homes and to build a secret tunnel
and room beneath his mansion in Laguna Hills.
Also indicted on the stock-option backdating was Broadcom's
former chief financial officer, William J. Ruehle. He was not
charged with the drug violations.
Ruehle, 66, was released on $2.6 million bail and surrendered
his passport, although he will be allowed to take three
international trips that were already planned. He will also be
arraigned June 16.
"It is critical to maintain the transparency of our financial
markets, something that these defendants allegedly attempted to
manipulate through the scheme, which created a false picture of
Broadcom's finances," U.S. Attorney Thomas P. O'Brien said in a
statement.
Broadcom, which makes microchips for cell phones and broadband
Internet devices, reported a strong first-quarter profit in April
and forecast second-quarter sales of $1.08 billion to $1.13
billion, ahead of Wall Street expectations.
The 18-page indictment on drug charges alleges that Nicholas
kept four properties in Orange County and Las Vegas, including a
warehouse in Laguna Niguel, Calif., where he stashed and
distributed cocaine, methamphetamine and ecstasy.
He later remodeled the warehouse with private rooms and
furnished it with art and high-end electronics.
The court documents also claim Nicholas hired prostitutes and
escorts for himself, his employees and customers and conspired to
get illegal prescriptions for drugs such as Valium.
In 2001, Nicholas smoked so much marijuana during a flight on a
private jet between Orange County and Las Vegas that the pilot had
to put on an oxygen mask, the indictment states.
Nicholas also required his unnamed coconspirators to provide
detailed invoices for drugs they sold to him, and used code names
such as "party favors" and "refreshments" to conceal what was
being sold, prosecutors alleged.
The allegations recall two earlier civil lawsuits filed against
Nicholas that accused him of rampant drug use and hiring
prostitutes. Both lawsuits were cited by prosecutors in a motion
filed Thursday that sought to deny bail for Nicholas.
One suit was filed by Nicholas' former bodyguard and personal
assistant, Kenji Kato, and the second by a construction crew that
claimed they were hired to build an underground lair for Nicholas
where he could indulge in sex with prostitutes and drug use.
The workers claimed Nicholas failed to pay them millions of
dollars and used intimidation and death threats to prevent them
from leaving the project, which was kept secret from Nicholas' wife
and city inspectors.
Nicholas faces a total of 21 counts in both federal indictments
filed this week, while Ruehle faces 21 counts in the stock options
indictment.
Ruehle allegedly filed false statements with the U.S. Securities
and Exchange Commission, falsely certified financial reports and
committed wire fraud.
Backdating stock options, which often are granted as hiring and
retention incentives, is legal. Companies across the company have
run into trouble when they failed to account for the true cost that
the backdating created because omitting that cost sometimes
inflated the companies' income.
The drug charges against Nicholas carry a maximum combined
sentence of 20 years in prison. He could face up to 340 years in
prison on the stock backdating charges.
Ruehle could face up to 370 years if convicted of all the
charges against him.
Last month, securities regulators cited Nicholas, Broadcom
co-founder Henry Samueli and Ruehle in a civil suit alleging they
falsified the company's reported income. The SEC also cited
Broadcom general counsel David Dull, but Dull and Samueli were not
named in Thursday's criminal indictments.
Nicholas served as CEO and president from Broadcom's inception
in 1991 until he resigned in 2003.
Ruehle joined the company in 1997 as vice president and chief
financial officer and retired in 2006.
Samueli, Nicholas' one-time Ph.D. adviser, stepped down as
chairman of the company's board of directors after the SEC action
last month.
Broadcom shares rose 65 cents, or 2.3 percent, to $28.75
Thursday, amid a general upswing in the stock market. They have
traded between $16.38 and $43.07 in the last 52 weeks.