SEC Launches Formal Probe of Broadcom

Broadcom's board is also canceling outstanding, unexercised stock options granted since its initial public offering held by three unnamed individuals. The value is the backdated options is $37 million.

Communications-chip maker Broadcom (Irvine, Calif.) previously announced that it received an informal inquiry from the SEC. On Dec. 14, the company was informed that the SEC has issued a formal order of investigation. Broadcom continues to cooperate with the SEC.

The firm is one of dozens of companies currently under scrutiny for historical stock options granting practices. Recently, Broadcom said it would restate finances for 2000 through 2005 and for the first quarter of 2006. The company expects to record additional non-cash stock-based compensation expenses of about $1.5 billion.

Citing the company's ongoing investigation into historical stock options granting practices, Broadcom Chief Financial Officer (CFO) William Ruehle abruptly stepped down in September.

On Monday, the company announced that its board has approved the findings and recommendations of its Audit Committee's review of the conduct and performance of Broadcom management, employees and directors involved in the company's stock option grant and equity award processes.

Broadcom previously announced that the Audit Committee had determined that the accounting measurement dates for most option grants awarded between June 1998 and May 2003 differ from the measurement dates originally used for such awards. The company expects to file an amended Annual Report on Form 10-K/A for 2005 and an amended Quarterly Report on Form 10-Q/A for the first quarter of 2006, reporting adjustments to its prior financial statements, with the SEC.

''The Audit Committee determined that in mid-2003 significant corrective changes were made to the option granting and documentation process. As a result, each of the option grants and other equity awards made since May 2003 has complied with prevailing accounting rules and is not subject to restatement,'' according to Broadcom.

''The Committee also determined that between June 1998 and May 2003 Broadcom's informal option grant procedures and processes lacked adequate controls, and that the company's documentation and recordkeeping were insufficient to verify many of the original measurement dates,'' according to the firm.

Each of the individuals deemed to have been actively responsible for the selection of option grant dates after the fact has either previously left the company for reasons unrelated to the options investigation, or has recently departed Broadcom as a result of the investigation, according the chip maker.

In addition, acting on the committee's recommendation, the board is canceling outstanding unexercised options granted since Broadcom's initial public offering held by three of the responsible individuals. The value of the options cancelled, based on the difference between their original exercise prices and the fair market value of the underlying shares on Dec. 15, 2006, is more than $37 million.

The Committee determined that all options and other equity awards granted to the company's founders and all current and former members of the board were properly granted. It also found that Broadcom's Chairman and Chief Technical Officer, Henry Samueli, and all outside directors reasonably relied upon management and professionals regarding the correct option accounting treatment and grant approval process.