Broadcom Admits to Options Backdating, Executives Held Faultless

An independent audit committee assembled by network technology provider Broadcom in the wake of the industry-wide SEC options backdating scandal, has found that stock options granted to executives and employees for a nearly five-year period were improperly accounted for.

Last Thursday, the company stated this morning, the Securities and Exchange Commission informed Broadcom that its investigation has entered the formal stage. Apple and Dell received similar notices last week, responding by making further delays to their quarterly and annual reports, leaving investors with a fuzzier picture of the actual capital value of these companies as the weeks pass.

As Broadcom's statement admitted this morning, any options granted to any employee since May 2003 were determined to be valid. But before that time - before the company caught wind of the SEC's probe - "certain executives and employees selected numerous grant dates after the fact."

Though backdating options - granting employees the right to purchase stock now based on yesterday's prices - is not illegal, the practice has become questionable, and may very well become illegal after a new Congress convenes next month. In the meantime, improperly accounting for those options is illegal. And as Broadcom put it very delicately, its audit committee found employees who received backdated options should perhaps have noticed it and said something about it.

"The Committee also concluded that certain other employees could have made additional inquiry or could have taken additional action to address the inadequacies in the option granting process," this morning's statement reads. As a result, employees have already agreed that the exercise dates of the options they've already been granted will be "un-backdated," to coin a phrase. Further, backdated options granted to at least three employees which have since been unexercised, will be cancelled.

That cancellation gives us the only glimpse into the extent of how much in earnings Broadcom will need to account for, when it re-states its earnings report. These three cancellations alone total $37 million.

Why didn't Broadcom account for these options properly? As the announcement states today, the company's accountants actually might not have known how: "Reflecting the lack of adequate controls, there was uncertainty and confusion as to the accounting rules for options, and certain individuals may have acted without fully understanding the rules or whether compensation charges should have been taken."

While reports have typically characterized the backdating of options as a form of compensation given to senior executives, perhaps as bonuses, a huge surprise in Broadcom's statement today is that the audit committee found 95% of the backdated options in question were granted to individuals other than executives - probably to middle managers.

"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 of Directors were properly granted," the statement reads, particularly singling out Chairman and CTO Henry Samueli, and all directors outside the company, as receiving only validly accounted-for options.

If the SEC investigation's conclusions concur with those of the audit committee, the backdating scandals could take on a completely new dimension, as investigators begin to question whether tech corporations helped inflate their once-colossal "bubbles" by compensating middle managers, rather than executives, with non-existent cash.