Drugs, Hookers Underscored Backdating Scheme, Feds Say

Prostitutes, drinks spiked with ecstasy and a massive stock-option-backdating scheme were business as usual for the top executives at high-tech firm Broadcom Corp., prosecutors charge in California federal court.

Two indictments filed in the U.S. District Court for the Central District of California paint a picture of out-of-control corporate leadership from 1999 to 2005 at the Irvine-based semiconductor maker.

Co-founder and former CEO Henry T. Nicholas III, 66, allegedly hired hookers for customers, supplied other industry executives with ecstasy-laced alcohol and ran a criminal narcotics operation complete with an underground room and tunnel at his Laguna Hills home.

Nicholas and former CFO William J. Ruehle, 48, also masterminded a stock-option-backdating scheme that eventually forced the company to write down $2.2 billion in profits, according to the charges.

Stock options are part of compensation packages in which executives receive company stock in addition to salary.

Illegal options backdating allows executives to earn an immediate profit by secretly getting the stock below current market value.

The secret dealing keeps the compensation off the company's books as a disbursement and artificially pumps up its bottom line.

"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," U.S. Attorney Thomas P. O'Brien said in a statement.

Broadcom did not respond to an e-mail request for comment.

The first indictment alleges a conspiracy to distribute thousands of dollars worth of ecstasy, cocaine and methamphetamines as "party favors" to Broadcom customers, representatives and the prostitutes.

The execs-gone-wild party atmosphere included a 2001 private plane trip from Orange County to Las Vegas in which the cabin was so filled with marijuana smoke that the pilot had to wear an oxygen mask, the indictment says.

A year later Nicholas allegedly paid $1 million to silence a Broadcom employee who threatened to publicly reveal the drug use, the indictment says.

Nicholas resigned Jan. 23, 2003, and Ruehle retired Sept. 19, 2006, according to media statements.

The company restated its financial reports in January 2007 to include the $2.2 billion in previously undisclosed options backdating.

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