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Broadcom Blames Co-Founder for Options Mess

In what could rank as one of the largest restatements since the stock options furor took off last year, chipmaker Broadcom said it would restate $2.24 billion in earnings covering 1998 through 2005.

Broadcom , in an amended quarterly report, also laid some of the blame for the earnings charges at the feet of co-founder Henry T. Nicholas III. In the the SEC report, filed yesterday, Broadcom said the former president and CEO "bears significant responsibility for the lack of adequate controls in the option granting process due to the tone and style of doing business he set."

It said it found "substantial evidence that Dr. Nicholas was at times involved with the selection of grant dates after the fact and with subsequent allocations of grants," but noted that he did not personally benefit from the restated grants. It said for reasons not related to the grants, Nicholas left the company in January of 2003.

Many of the nearly 240 million shares granted between 1998 and 2003 "differed from measurement dates previously used for such awards."

CEO Scott McGregor also stressed that the restatement "has had no material impact on Broadcom's current strong financial and cash position."

Although the complete charges between 1998 through the first three months of 2006 were $2.69 billion, after adjustments, including terminating options worth around $400 million, the final amount was $2.24 billion, according to a Broadcom statement.

The chipmaker said its review discovered that some stock option grants were made through undocumented informal meetings or phone conversations. For example, Broadcom cited lack of "contemporaneous documentation" in 68 instances of options awards it reviewed, according to its revised quarterly report.

"The audit committee found that Broadcom's informal stock option grant procedures and processes lacked adequate controls, and that its documentation and record keeping were insufficient," the company said in its revised SEC filing.

A Broadcom spokesperson refused further comment.

Although Broadcom's probe said current company executives were not involved in the stock options morass, the investigation singled out three former top executives, including the co-founder, for blame.

Broadcom's former finance chief, William Ruehle was at the center of the flawed options process, according to the company. Ruehle was responsible for lack of controls and documentation of stock options. The former chief financial officer also "engaged in the selection of grant dates after the fact," including some shares he owned, according to the updated financial report. Ruehle, who held the CFO post between 1998 and January, 2006, left Broadcom two days company investigators interviewed him.

The company also pointed to Nancy Tullos, Broadcom's former Vice President of Human Resources between 1998 and June 2003. Tullos was "fully aware of what was occurring and encouraged, assisted in, and enabled it," according to the new report.

Late last year, Broadcom announced it was the focus of a formal SEC investigation into the company's stock option procedures. At the time, Broadcom mentioned only "certain executives and employees" were to blame.

The news follows a year replete with financial restatements by companies, especially tech providers such as Juniper, Sycamore, VeriSign and others.

"Ironically, less than a third of the total charges taken relate to options that were actually exercised by employees or remain outstanding today," McGregor said.

Broadcom stock was up more than three percent to $30.47 in late morning trading.