There has been widespread news coverage of the dramatic December 15, 2009 decision of Central District of California Judge Cormac Carney to throw out the options backdating related criminal charges against Broadcom co-founder Henry T. Nicholas III and CFO William Ruehle, based on prosecutorial misconduct.
But even though many of press accounts have reproduced some of Judge Carney’s harshest words – particularly his statement that the government’s treatment of a third defendant, Henry Sameuli, was "shameful and contrary to American values of decency" – the excerpts do not come close to capturing the depth and breadth of the Judge’s condemnation of the prosecutor’s conduct.
The transcript of the December 15 hearing at which Judge Carney delivered his ruling can be found here. I strongly recommend taking a few minutes and reading the entire transcript (it is relatively short), because only a complete reading truly conveys the extent of Judge Carney’s censure.
His reproach of the prosecutors is comprehensive, extensive and scathing. Judge Carney dropped a bomb on the prosecution. Not by accident, as if he got a little angry and then got carried away. No. Judge Carney clearly and consciously intended to summon every molecule of the power of his position and marshalled every tool in the arsenal of language. Judge Carney’s decision is a case-hardened, bunker-buster, heat -seeking bomb — that hit the bulls-eye.
Among other things, he cites the prosecutors for "intimidating and improperly influencing" witnesses, which "compromised the truth process and compromised the integrity of the trial"; for making improper leaks to the media; for improperly pressuring Broadcom to terminate Samueli; for obtaining an "inflammatory indictment" of Samueli; and crafting "an unconscionable plea agreement" with Samueli.
Assistant U.S. Attorney Andrew Stolper, the lead prosecutor in the case, received particularly sharp criticism. Among other things, Judge Carney said that "the lead prosecutor somehow forget that truth is never negotiable." Of the case against Ruehle, Judge Carney said that to submit it to the jury "would make a mockery of Mr. Ruehle’s constitutional right to compulsory process and a fair trial."
In addition to the sheer potency of Judge Carney’s rhetoric, there are several other interesting aspects to Judge Carney’s rulings, some of which have not been fully noted in press reports.
The first is that Judge Carney’s decision to dismiss the case against Nicholas came during Ruehle’s trial. Nicholas was to be tried separately later. There was not even a motion on behalf of Nicholas pending. Moreover, Judge Carney’s dismissal of the indictment of Nicholas came just days after Judge Carney dismissed Samueli’s prior guilty plea, following Samueli’s testimony at Ruehle’s trial. Judge Carney’s decisions to first dismiss Samueli’s guilty plea and then to dismiss the case against Nicholas shows the extent of the concerns that were raised in Judge Carney’s mind as Ruehle’s trial unfolded.
Second, Judge Carney not only dismissed the criminal cases, he dismissed the SEC’s options backdating related enforcement action without prejudice –again, even though that SEC enforcement action was not formally before Judge Carney at the time. Judge Carney allowed the SEC thirty days to file an amended complaint, but he did also "discourage" the SEC from proceeding further, since "the government’s misconduct has compromised the integrity and legitimacy of the case" and the evidence during Ruehle’s trial "established that the SEC will have great difficulty proving that the defendants acted with reckless scienter."
Judge Carney also ordered the government to show cause why the separate drug distribution-related indictment against Nicolas should not be dismissed, and scheduled a date in February 2010 for the matter to be heard. Among concerns Judge Carney noted about the drug indictment is "government’s threats to issue a grand jury subpoena to Dr. Nicolas’ 13-year old son and force the boy to testify against his father."
Third, as part of discouraging the SEC from refiling its complaint, Judge Carney raised fundamental questions that go to the heart of the entire options backdating brouhaha –immediately after he had said that the SEC will have difficulty proving scienter. He said:
The accounting standards and guidelines were not clear, and there was considerable debate in the high-tech industry as to the proper accounting treatment for stock option grants. Indeed, Apple and Microsoft were engaging in the exact same practices as those of Broadcom.
These remarks suggest that, in addition to all of Judge Carney’s other concerns about the prosecutor’s misconduct, he also has fundamental concerns about whether there could possibly have been a culpable state of mind in connection with backdating. His reference to the uncertainty of the applicable standards and extent of the practices (even Apple and Microsoft!) certainly seems to raise questions about whether any criminal prosecution or even enforcement action is appropriate, not just the one against the Broadcom defendants.
Judge Carney clearly is quite sure that there was something wrong with the prosecutor’s actions in prosecuting the case, but he doesn’t seem to be sure at all whether or not there is actually anything wrong with backdating itself. Could these two points be related? Hmmm…
Indeed, this fundamental problem with the backdating allegations may explain why prosecutors have had so much trouble obtaining and retaining backdating convictions. Thus, for example, the conviction of former Brocade Communications CEO Gregory Reyes was overturned, again for prosecutorial misconduct (based on improper statements prosecutors made to the jury), and McAfee’s former general counsel, Kent Roberts, was acquitted.
It does sort of make you wonder whether Kobe Alexander might now having second thoughts about his decision to flee to Namibia rather than face the criminal charges for alleged options backdating at Comverse.
Though the Broadcom criminal indictments have been dismissed and the SEC enforcement action has also been dismissed, possibly for good, an enormous amount of damage has been done. There is not only the terrible toll that the legal actions took on the lives of the individual criminal defendants. There is the almost unbelievable cost that all of these actions imposed on the company and its insurers.
As I noted in a prior post (here), Broadcom agreed, as part of the settlement of the options backdating-related shareholders’ derivative lawsuit, to settle its claims against its directors’ and officers’ liability insurers for $118 million, all of which represented a payment to the company in reimbursement of defense expenses incurred in connection with the various backdating-related legal proceedings. In the recitals to the insurance settlement, the parties stated that at point Broadcom’s cumulative legal expenses exceeded $130 million.
It is very hard not to conclude that entire sorry options backdating scandal has been an enormous waste, of time, talent and money.
There have been a number of interesting blog posts about Judge Carney’s dismissals of the Broadcom indictments, including items on the SEC Actions blog (here) and on the Ideoblog (here). The WSJ.com Law Blog has a post (here) comparing Judge Carney to Judge Rakoff.
Special thanks to Nancy Adams of the Mintz Levin firm for forwarding me a copy of the hearing transcript.
Even More Failed and Troubled Banks Next Year?: According to yesterday’s Wall Street Journal (here), the FDIC is looking to increase its budget by 35% next year and to add 1,600 new staffers, as the agency struggles to deal with the complications from the wave of failed and troubled banks. Among the reasons that agency Chairman Sheila Bair cited to justify moves is that the increases "will ensure that we are prepared to handle an even larger number of bank failures next year, if that becomes necessary, and to provide regulatory oversight for an even larger number of troubled institutions"
The suggestion that the FDIC must be prepared for even more failed and troubled banks in 2010 is disturbing. There have already been 130 failed banks this year, and at the time of the FDIC’s last Quarterly Banking Profile, the FDIC reported that there were 552 Problem Institutions as of September 30, 2009, as noted here. Put simply, the FDIC thinks in order to be prepared for 2010, it has to be ready to deal with more than 130 additional bank failures next year and more than 552 troubled institutions.
Clearly, the banking industry’s problems are deep and continuing. The problems associated with failed and troubled banks are among the most significant concerns as we head into 2010.
Goodbye to All That: The blogosphere is losing one of its most talented and esteemed members. Yesterday, our friend, law-school compatriot and fellow blogger, Mark Herrmann, of the incomparable Drug and Device Law Blog, announced that he is retiring from blogging. Alas.
Herrmann, who has been a partner at Jones Day since before dinosaurs roamed the earth, is leaving Big Law to go be a client — I mean , to become Vice President and Chief Counsel – Litigation at AON Corporation. As a result, Herrmann no longer thinks he will have as much time to write about legal issues surrounding medical drugs and devices — go figure.
Herrmann is moving on to do God’s work, defending against unscrupulous types who would presume to sue insurance brokers. But as a result, the blogosphere is losing one of its most intelligent, cantankerous and amusing voices. Have no fear, his blogging partner (A blogging partner! What a concept! I should have thought of that!), Jim Beck, will be carrying on the fine tradition of the Drug and Device Law Blog.
Everyone here at The D&O Diary wishes Herrmann every success at AON. May the force be with you, Mark. Welcome the world of insurance brokerage, dude.