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Message to executives: Watch what's in that drink.
On Wednesday, a U.S. district attorney for the central district of California indicted Broadcom (nasdaq: BRCM - news - people ) co-founder and former Chief Executive Henry T. Nicholas, 48, and former Chief Financial Officer William Ruehle, 66, on charges of stock-options manipulation. Nicholas was also charged with using and distributing illegal drugs. Nicholas is a self-made billionaire whose wealth Forbes estimates to be around $1.8 billion. Among the charges: Nicholas spiked the drinks of industry executives and Broadcom partners with drugs such as ecstasy, cocaine and methamphetamine.
The charges were made public Wednesday after Nicholas surrendered to special agents from the FBI.
The government alleges that between 1999 and 2005, Nicholas and Ruehle fraudulently backdated millions of stock option grants, failed to record stock-based compensation expenses and falsified documents. Broadcom was forced to restate several years of financial results in January 2007, reporting an additional $2.2 billion in expenses. The restatement was the largest any company has had to make in association with the stock-options scandals that have dogged the industry for the past few years.
"Nicholas and Ruehle were involved in a wide-ranging fraud that resulted in the largest financial restatement related to options backdating in the United States," said U. S. Attorney Thomas P. O'Brien in a statement.
Mike Li, vice president of engineering at Watercooler, a Web applications developer in Mountain View, Calif., says he's not surprised by the backdating indictment. "A bunch of companies did it, and they're being caught now," he says.
"The drug charges are like ... wow!" Li says. "This guy seems like he's got some issues. Who thinks about spiking the drinks of your technology executives? I am a little bit floored that someone at that level would resort to things like that."
Although government investigators have pursued cases of stock-options abuse in Silicon Valley, the penalties they have won have been relatively modest. The government carried out a high-profile investigation against former investment banker Frank Quattrone, which fizzled. Questions raised about Apple Chief Executive Steve Jobs have been dismissed.
Broadcom may be a different story. When Broadcom restated its results in January 2007, the company tried to downplay concerns--and tried to shift blame to former human resources head Nancy Tullos. Last year, Tullos pleaded guilty to charges of obstructing justice and cooperated with the government's investigation of the case.
Legal observers suggested Wednesday that pairing the stock-options charges against Nicholas and Ruele with drug charges (just against Nicholas) was a bit of theatrics designed to hammer home a message. This is a "'talking indictment,'" says John Coffee, professor of law at Columbia University. "It's done to influence the jury and press."
"Broadcom has been implicated publicly in backdating options for a while," says Edward Deibert, a director at San Francisco-based law firm Howard Rice Nemerovski Canady Falk & Rabkin. "Theirs was one of the bigger, more flagrant abuses of the backdating scandal. So an indictment on those issues is not very surprising."
The backdating and drug charges seem like "dissonant, unrelated events," says Deibert. "It could just be a heaping on and making things harsher for him. [The drugs] makes a bigger splash of what [the government] is doing. This is the flashiest indictment so far."
The government seems to have plenty of details to work with. Nicholas' larger-than-life reputation has long been the stuff of gossip within Silicon Valley. In Broadcom's early days, the stories were deftly showcased to portray Nicholas as a hard-charging, passionate executive who pumped iron and subsisted on PowerBars.
As early as 2002, however, company directors began trying to distance Broadcom from Nicholas. A 2004 story in The Wall Street Journal quotes Broadcom's lead independent director as telling Nicholas, "I don't want you to be the CEO anymore. I don't think you're competent to direct people."
Nicholas resigned from Broadcom in 2003, claiming he was trying to salvage a failing marriage. The couple went through a bitter divorce.
The indictment describes how Nicholas used and shared ecstasy, cocaine, and methamphetamine at his homes in Laguna Hills, Newport Coast and Las Vegas. At parties, Nicholas reportedly served up spiked drinks to industry executives and hired prostitutes. Once, while riding in a private plane between Orange County, Calif., and Las Vegas, Nicholas and his colleagues apparently smoked so much marijuana that the pilot of the plane had to don an oxygen mask.
The government charges also include descriptions of multiple invoices to Nicholas for "party favors," that were tablets of ecstasy and other drugs. The government alleges that in June 2002, Nicholas paid a former employee who had detailed knowledge of the executive's drug use $1 million in what was effectively "hush money."
The indictment was certainly getting the attention of executives in Silicon Valley Wednesday. Even tiny start-ups now pay scrupulous attention to any details of stock-option plans, asserts Keith Rabois, vice president of business development at Slide, a San Francisco-based Web applications company.
And for the drugs? "That's crazy!" Rabois says. "That's never happened at any company I'm familiar with, except maybe lacing drinks with caffeine. I can't even fathom that kind of activity."
Tom Van Riper contributed to this report.
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