A federal judge Tuesday dismissed all charges against the remaining two defendants in the government's sweeping securities fraud case against chip-maker Broadcom Corp., citing what he called "shameful" prosecutorial misconduct and a lack of evidence.
The dismissals were a stunning reversal that elicited gasps from the courtroom and tears from Broadcom's former chief financial officer and former CEO, who had faced the prospect of years in prison for their alleged crimes.
U.S. District Judge Cormac J. Carney dismissed the charges two days before the jury was to begin deliberations for former CFO William J. Ruehle, who had pleaded not guilty to 14 counts of fraud and conspiracy related to stock option backdating.
Carney also dismissed similar charges against Broadcom co-founder and former CEO Henry T. Nicholas III and challenged the government to defend its separate narcotics indictment against Nicholas, who is set to go on trial next year.
Those unrelated charges include allegations that Nicholas slipped ecstasy into the drinks of business associates, maintained a drug warehouse and concealed illegal conduct with bribes and death threats. He has pleaded not guilty.
Carney said evidence in the securities case shows prosecutors tried to influence the testimony of three key witnesses, improperly contacted witnesses' attorneys and leaked information about grand jury proceedings to the media.
"I find that the government has intimidated and improperly influenced the three witnesses critical to Mr. Ruehle's defense and the cumulative effect of that misconduct has distorted the truth-finding process," Carney said. "To submit this case to the jury would make a mockery ... of the constitutional right to due process and a fair trial."
The judge said Nicholas would need the same witnesses to try to prove his own innocence and therefore could not receive a fair trial.
Nicholas and Henry Samueli started Broadcom in 1991 and took it public in 1998. The Irvine, Calif., company grew to 7,000 employees worldwide and is a leading manufacturer for the chips used in everything from cable boxes to cell phones. It had nearly $5 billion in revenue last year.
Tuesday's rulings were a brutal blow for the government, which obtained indictments against Nicholas and Ruehle last year after federal authorities in 2006 began investigating stock options granted by hundreds of companies. While many companies settled with the Securities and Exchange Commission, criminal cases were much less common, and they've had trouble sticking.
A federal appeals court, citing prosecutorial misconduct, ordered a new trial this year for the former CEO of Brocade Communications Systems Inc. in his high-profile backdating fraud case. Earlier this year, a jury acquitted McAfee Inc.'s former general counsel on similar charges.
KB Homes' former CEO is set to go on trial in February on charges that he manipulated stock options, while the former CEO of voicemail-software maker Comverse Technology Inc., fled to Namibia to avoid prosecution.
Backdating involves retroactively setting a stock option's exercise price to a low point in the stock's value, boosting profits when the shares are sold. It is legal when properly accounted for, but if not properly disclosed it can allow companies to overstate profits and underpay taxes.
Broadcom was ultimately forced to write down $2.2 billion in profits after its actions were uncovered.
Samueli, the company's chairman, pleaded guilty last year to a single count of lying to SEC investigators, but Carney exonerated Samueli last week after hearing him testify for Ruehle under a grant of immunity.
"The government embarked on a campaign of humiliation and other misconduct to embarrass him and bring him down," Carney said Tuesday, calling the 55-year-old a "brilliant engineer and man of incredible integrity."
Carney also dismissed an SEC civil action against Nicholas, Samueli, Ruehle and another former executive and struck from the record the testimony of a former Broadcom manager who became a government witness.
The defendants and their attorneys were jubilant outside court. Samueli, a billionaire philanthropist and owner of the NHL's Anaheim Ducks, said Carney's ruling had restored his faith in the judicial system.
"It was beyond description, and to me, the most important thing was he finally cleared the air, cleared the name of Broadcom," Samueli said. "To see Broadcom smeared was so painful to me."
Prosecutors declined to comment, but acting U.S. Attorney George Cardona told the judge he did not agree with the ruling. Prosecutors can appeal the dismissal of Nicholas' indictment, but Ruehle, 67, cannot be tried again because it would be double jeopardy.
The SEC can refile an amended civil complaint within 30 days.
Legal experts following the case said the judge's actions were astonishing and showed he was deeply disturbed by the government's alleged misconduct.
Throwing out an entire case _ especially against multiple defendants _ is a remedy of last resort, said Lawrence Rosenthal, a law professor at the Chapman University School of Law in Orange and a former federal prosecutor.
"It seems certain that prosecutors will face at least an internal investigation," Rosenthal said. "The very worst case scenario for the prosecutor is he could face witness tampering or obstruction of justice charges, but it's very premature to opine on that."
In a hearing last week, lead prosecutor Andrew Stolper acknowledged leaking information to the press and called it the "stupidest thing I have done in my career."
He has declined to comment outside court, but in court papers filed last year, the government argued that Stolper provided information that was not under grand jury subpoena and therefore did nothing wrong.