Broadcom Corp. co-founder Henry Samueli said Tuesday that his semiconductor company awarded thousands of stock option grants to employees in the years after the company's initial public offering, but he didn't think there was anything illegal or improper in the way it was done.
Samueli, 55, testified as a defense witness in the federal fraud trial of Broadcom's former chief financial officer, William Ruehle, who is accused of illegally backdating stock options. Ruehle has pleaded not guilty to 14 counts of fraud and conspiracy.
Backdating occurs when a company retroactively sets the options' exercise price to a low point in the stock's value to increase the recipient's profits when the shares are sold. The practice is not illegal if accounted for correctly, but if backdating isn't properly disclosed, it can allow companies to overstate their profits and underpay taxes while diminishing shareholder value.
Federal prosecutors allege that Samueli, Ruehle and Broadcom co-founder Henry T. Nicholas III backdated stock options to benefit employees, keeping information about millions of dollars in compensation from shareholders. Nicholas is scheduled for trial early next year.
Irvine, Calif.-based Broadcom hasn't admitted wrongdoing, but the computer chipmaker reduced previous financial results by $2.2 billion in 2007 and agreed to pay $12 million to settle a civil complaint over the issue.
Samueli, the billionaire owner of the NHL's Anaheim Ducks, pleaded guilty last year to lying to the Securities and Exchange Commission during its investigation and is awaiting sentencing. The judge overseeing Ruehle's trial took the unusual step of granting Samueli immunity for his testimony Tuesday.
Samueli testified that after Broadcom went public in 1998, the company grew from 150 to 3,000 employees in just two years. Broadcom also acquired 22 companies after its IPO.
He told jurors that Broadcom paid lower salaries than its competitors but offered potentially lucrative stock options to all its employees to compensate. This strategy meant Broadcom employees were more vested in Broadcom's success than if they received cash bonuses, he said.
Samueli said that because so many new hires were joining the company, Broadcom leadership began issuing stock option grants for groups of new employees every few weeks to minimize the paperwork. Samueli said he and others would watch the stock price and try to issue the options on a date when the price was low so it would be more favorable.
Ruehle's defense attorney, Richard Marmaro, showed jurors an e-mail from a new hire who started a week earlier than his planned hire date _ and in the intervening week, Broadcom's stock price rose from $122 to $197 per share. The employee estimated that week's difference totaled more than $3.3 million in potentially reduced profit.
Samueli said employees were very aware of fluctuations in the stock price and how they would affect the value of their stock options.
"If an employee joins one week and the next week his roommate joins and the stock price is higher, his roommate will feel that and he'll complain to human resources and we'll ultimately hear about it," Samueli said.
He also described how, as Broadcom grew, the company began issuing annual "anniversary" stock option grants for all employees at one time instead of on each employee's actual anniversary of hire.
He said this reduced paperwork and was equitable to employees because they received the same exercise price regardless of hire date. Samueli said Broadcom executives in picking the anniversary grants could "take our time and wait until we saw a bottoming out of stock price and then we would grant the shares."
He said he never had any indication that any of these practices were illegal or improper.
Samueli was to serve five years of probation and pay $12 million to the federal government for lying to the SEC, but U.S. District Judge Cormac J. Carney rejected the plea deal as too lenient. Samueli appealed that rejection and lost.
Carney is expected to sentence Samueli after Ruehle's trial.
Samueli's legal team, however, has asked a judge to dismiss the charge due to prosecutor misconduct, including allegations that Assistant U.S. Attorney Andrew Stolper leaked private grand jury information to the media.
Stolper is also accused of contacting the attorney of another defense witness about his upcoming testimony.
"I felt like I was being strong-armed by my own government," Samueli said of the misconduct allegations. "I literally felt like I was dealing with the mafia."
Stolper was removed from making decisions about Samueli's prosecution at the request of the defense and was not present in court Tuesday for his testimony. Stolper has declined to comment on the allegations.
Carney has said he will rule on the motion to dismiss after a verdict in Nicholas' and Ruehle's trials. Ruehle's trial could wrap up as early as this week.