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United States v. Nicholas

December 15, 2008

UNITED STATES OF AMERICA, PLAINTIFF,
v.
HENRY T. NICHOLAS, III AND WILLIAM J. RUEHLE ET AL. DEFENDANTS.



The opinion of the court was delivered by: Cormac J. Carney United States District Judge

INTRODUCTION

ORDER REGARDING DEFENDANTS' PRE-TRIAL MOTIONS

On June 4, 2008, a grand jury returned an indictment related to the backdating of stock options ("Indictment") at Broadcom Corporation ("Broadcom") against Defendants Henry T. Nicholas, III ("Dr. Nicholas") and William J. Ruehle ("Mr. Ruehle") (collectively "Defendants"). As a broad overview, the Indictment alleges a scheme to "disguise, conceal, understate, and mischaracterize compensation expenses Broadcom was required to recognize in connection with its stock options." (Indictment ¶ 15.) "By fraudulently backdating and repricing option grants," the Indictment alleges, "[Dr. Nicholas and Mr. Ruehle] and their co-conspirators deceived Broadcom's shareholders, potential shareholders, and auditors" about $2.2 billion in unreported employee compensation expenses. (Indictment ¶¶ 15d, 17.) The scope of the alleged scheme was extensive, resulting in "tens of millions of backdated in-the-money and repriced options." (Indictment ¶ 15c.)

Before the Court are numerous motions brought by Defendants. These motions include challenges to the sufficiency of the Indictment, requests for information related to the grand jury, motions regarding alleged prosecutorial misconduct, and other motions regarding peremptory challenges and the filing of additional motions should it become necessary. For the following reasons, Defendants' motions are DENIED, with the exception of the motion for access to certain grand jury records, which is GRANTED in part.

ANALYSIS

I. Challenges to the Indictment

A. The Government's Indictment

The government's sixty-five-page Indictment includes twenty-one counts. Count 1 of the Indictment charges Dr. Nicholas and Mr. Ruehle with conspiracy, the objects of which include the following offenses: securities fraud; filing false reports with the Securities and Exchange Commission ("SEC"); accounting fraud; lying to outside auditors; honest services mail and wire fraud. (Indictment ¶ 18.) The government alleges that Dr. Nicholas and Mr. Ruehle "falsely claimed that the Option Committee met on" specific past dates "to make it appear" that in-the-money grants were made at-the-money; "repriced options to more favorable strike prices without taking required compensation expenses"; "circumvented Broadcom's Compensation Committee to backdate and reprice options without obtaining the Compensation Committee's contemporaneous permission"; "circumvented Broadcom's option plan and fraudulently concealed and mischaracterized expenses relating to option grants made to newly hired Broadcom employees by falsely making it appear that employees were hired to work at a company Broadcom was acquiring"; and created fraudulent corporate records. (Indictment ¶¶ 20-25.) Count 2 charges Defendants with securities fraud. Counts 3 through 7 charge Defendants with falsely certifying financial reports. Counts 8 and 9 charge Defendants with making false statements in reports filed with the SEC. Counts 10 through 12 charge Defendants with lying to accountants. Counts 13 through 17 charge Defendants with falsification of corporate books and records. Counts 18 through 21 charge Defendants with honest services mail and wire fraud.

B. Federal Rule of Criminal Procedure 7(c)

Federal Rule of Criminal Procedure 7(c) requires that an indictment contain only "a plain, concise, and definite written statement of the essential facts constituting the offense charged." FED. R. CRIM. P. 7(c). The Supreme Court has noted that an indictment has two essential purposes: first, it must contain "the elements of the offense charged and fairly inform[] a defendant of the charge against him which he mustdefend," and second, the indictment must "enable[] him to plead an acquittal or conviction in bar of future prosecutions for the same offense." Hamling v. United States, 418 U.S. 87, 117 (1974).Although an indictment must serve these functions, the indictment need not contain particulars above and beyond those necessary to put the defendant on notice of the charges against him. See United States v. Crow, 824 F.2d 761, 762 (9th Cir. 1987).Finally, an indictment returned by a properly constituted, unbiased grand jury cannot be challenged on the basis of the adequacy or competency of the evidence before the grand jury. Costello v. United States, 350 U.S. 359, 362-63 (1956); United States v. Jensen, 93 F.3d 667, 669 (9th Cir. 1996).

C. Defendants' Motions Challenging the Indictment

Defendants' motion to dismiss Counts 1-4, 8-11, and 18-21 on the ground that the alleged false statements and acts of concealment are immaterial as a matter of law is DENIED.Defendants argue that because the price of Broadcom stock increased when Broadcom announced its restatement, the alleged false statements and alleged acts of concealment are immaterial as a matter of law. This argument fails because materiality is a question of fact that must be decided by a jury. The Supreme Court has held that the determination of materiality is a fact-specific inquiry, which depends on whether there is a "substantial likelihood" that a reasonable investor would consider the information relevant. Basic, Inc. v. Levinson, 485 U.S. 224, 231 (1988). In a criminal case, materiality is a question of fact that must be determined by a jury. United States v. Gaudin, 515 U.S. 506 (1995). In the context of a motion for summary judgment, the Ninth Circuit has held that statements or omissions may be material notwithstanding a lack of immediate market response after their disclosure to the public. No. 84 Employer-Teamster Joint Council Pension Trust Fund v. Am. W. Holding Corp., 320 F.3d 920, 934 (9th Cir. 2003). Finally, the Court does not agree with Defendants' contention that markets are necessarily characterized by informational efficiency. The Indictment properly alleges that the statements and acts of concealment are material. (Indictment ¶¶ 134, 136, 138, 141, 144, 148, 151.) Accordingly, the issue of materiality must be determined by the jury on the basis of the evidence presented at trial and proper instructions by the Court on the applicable law.

Defendants' motion to dismiss the third prong of Count 4 for failure to state an offense is DENIED. Count 4 charges Defendants with materially misrepresenting the financial condition of the corporation in Broadcom's third quarter 2002 10-Q pursuant to 18 U.S.C. § 1350 by certifying that the 10-Q "fairly presented, in all material respects, the financial condition and results of operations of Broadcom." (Indictment ¶ 136.) The third prong of this Count refers to a specific representation that rendered the above certification false: the representation that all fraud "whether or not material" was disclosed. Defendants argue that if the undisclosed fraud were immaterial, the certification that the 10-Q represented the financial condition of the corporation in all material respects would not be false. Likewise, if the undisclosed fraud did not affect the financial condition of Broadcom, the certification that the 10-Q represented the financial condition of the corporation in all material respects would not be false. The Court notes simply that the Indictment sufficiently alleges that Defendants materially misrepresented the financial condition of Broadcom by failing to disclose the allegedly fraudulent stock option granting practices. The issue of materiality must be determined by the jury on the basis of the evidence presented at trial and proper instructions by the Court on the applicable law.*fn1 United States v. Gaudin, 515 U.S. 506 (1955).

Defendants' motion to dismiss Counts 13-17 and the relevant portion of Count 1 for failure to allege materiality is DENIED. Counts 13-17 charge falsification of corporate books and records in violation of 15 U.S.C. §§ 78m(b)(2)(A), 78m(b)(5), and 78ff and 17 C.F.R. § 240.13b2-1. Defendants argue that § 78ff(a) has an implied materiality requirement, and because the indictment fails to allege the materiality of the alleged falsification, Counts 13-17 and the portion of Count 1 that charges conspiracy to commit these offenses must be dismissed. The Court does not find Defendants' argument persuasive. As Defendants concede, the plain text of the portion of the statute that defines the criminal penalties for the offense has no materiality requirement. 15 U.S.C. § 78ff(a). Likewise, the legislative history does not suggest that the purpose of the statute is to punish solely material falsification of corporate records. The statute was enacted not only to prevent materially false statements in government filings, but to increase confidence in corporate governance by requiring honest record-keeping. See United States v. Jensen, 532 F. ...


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