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Indictment: Broadcom ex-CEO built drug warehouse

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By GILLIAN FLACCUS ? 1 hour ago

SANTA ANA, Calif. (AP) ? Federal prosecutors may have charged Broadcom co-founder Henry T. Nicholas III in one of the largest stock-option backdating cases in U.S. history, but it was allegations that the billionaire drugged his business cohorts, hired prostitutes and maintained a drug warehouse that grabbed headlines.

A pair of indictments unsealed Thursday charge the 48-year-old with conspiracy and securities fraud in an alleged scheme to backdate stock options that ultimately forced Broadcom to write down $2.2 billion in profits last year. But prosecutors also detailed a litany of drug charges that apparently came as a surprise to Nicholas and his attorneys.

The charges threaten to ground a high-flying lifestyle that prosecutors say featured the former CEO jetting around the world in his two private planes, building a secret lair under his house and hiring strippers to party at a private warehouse stocked with cocaine, methamphetamine and ecstasy.

Defense attorney Gregory Craig said that Nicholas was innocent and would prevail.

"It's a kitchen-sink attack on Dr. Nicholas. They're trying to throw everything at him from eight years ago," Craig said.

At a court hearing, U.S. Magistrate Arthur Nakazato set Nicholas' bail at $3.3 million. He also ordered random weapons searches and drug tests by the government, home detention, electronic monitoring and the disabling of Nicholas' two private planes. Nicholas, in handcuffs and wearing gray slacks and a white shirt with no tie or belt, nodded vigorously when asked if he agreed to the conditions of release.

Nakazato said he was concerned that Nicholas' extreme wealth could allow him to flee at any moment. He indicated that Nicholas' current Newport Coast home, valued at $15 million to $18 million, would be no impediment to flight for "one of the wealthiest men in the world." Nakazato also said he was bothered by government allegations that Nicholas had threatened and hit a grand jury witness last year during an argument on a private jet.

"If you flee, I will detain you and I will order an arrest warrant and I'll have the marshals and the FBI going on a hunt for you," Nakazato said. "And when they bring you back, I'm not going to show much mercy."

An arraignment hearing was set for June 16. Nicholas did not enter a plea.

Also indicted on the stock-option backdating was Broadcom's former chief financial officer, William J. Ruehle. He was not charged with the drug violations.

Ruehle, 66, was released on $2.6 million bail and surrendered his passport, although he will be allowed to take three international trips that were already planned. He will also be arraigned on June 16.

Ruehle's attorney, Richard Marmaro, said in a statement, "Bill Ruehle is innocent of the charges in the indictment, and he looks forward to the opportunity to clear his good name in a court of law."

Nicholas, who has a Ph.D. in electrical engineering, co-founded Broadcom Corp. in 1991 with Henry Samueli. The company, which makes microchips for cell phones and broadband Internet devices, reported a strong first-quarter profit in April and forecast second-quarter sales of $1.08 billion to $1.13 billion, ahead of Wall Street expectations.

The 18-page indictment on drug charges alleges that Nicholas kept four properties in Orange County and Las Vegas, including a warehouse in Laguna Niguel, Calif., where he stashed and distributed cocaine, methamphetamine and ecstasy.

He later remodeled the warehouse with private rooms and furnished it with art and high-end electronics.

The court documents also claim Nicholas hired prostitutes and escorts for himself, his employees and customers and conspired to get illegal prescriptions for drugs such as Valium.

In 2001, Nicholas smoked so much marijuana during a flight on a private jet between Orange County and Las Vegas that the pilot had to put on an oxygen mask, the indictment states.

At a July 1999 Woodstock concert in Rome, N.Y., Nicholas gave a technology executive ecstasy without the executive's knowledge, the indictment states. Nicholas also allegedly spiked a technology executive's drink with ecstacy in New Orleans in early 2000.

Nicholas required his unnamed co-conspirators to provide detailed invoices for drugs they sold to him, and used code names such as "party favors" and "refreshments" to conceal what was being sold, prosecutors claimed.

The allegations recall two earlier civil lawsuits filed against Nicholas that accused him of rampant drug use and hiring prostitutes. One lawsuit was cited by prosecutors in a motion filed Thursday that sought to deny bail for Nicholas.

That suit was filed by Nicholas' former bodyguard and personal assistant, Kenji Kato. A second lawsuit was filed last year by a construction crew that claimed they were hired to build an underground lair for Nicholas where he could indulge in sex with prostitutes and drug use.

The workers claimed Nicholas failed to pay them millions of dollars and used intimidation and death threats to prevent them from leaving the project, which was kept secret from Nicholas' wife and city inspectors.

Nicholas faces a total of 21 counts in both indictments. The drug charges carry a maximum combined sentence of 20 years in prison. He could face up to 340 years in prison on the stock backdating charges.

Ruehle faces 21 counts in the stock options indictment, which accuses him of filing false statements with the U.S. Securities and Exchange Commission, falsely certified financial reports and committed wire fraud. Ruehle could face up to 370 years if convicted of all counts.

Backdating stock options, which often are granted as hiring and retention incentives, is legal. Companies across the company have run into trouble when they failed to account for the true cost that the backdating created because omitting that cost sometimes inflated the companies' income.

Last month, securities regulators cited Nicholas, Samueli and Ruehle in a civil suit alleging they falsified the company's reported income. The SEC also cited Broadcom general counsel David Dull, but Dull and Samueli were not named in Thursday's criminal indictments.

Nicholas served as CEO and president from Broadcom's inception until he resigned in 2003. At the time, he said he stepped down to try to repair his relationship with his wife.

Nicholas' attorneys said in court Thursday that he has been at a $66,000-a-month Malibu drug rehabilitation center since April.

Ruehle joined the company in 1997 as vice president and chief financial officer and retired in 2006.

Samueli, Nicholas' one-time doctoral adviser, stepped down as chairman of the company's board of directors after the SEC action last month.

Shares rose 65 cents, or 2.3 percent, to $28.75 on Thursday, amid a general upswing in the stock market. Its 52-week trading range was between $16.38 and $43.07.