This post has been updated at the bottom of page 3 to reflect former federal prosecutor Andrew Stolper's side of the story. Read more about him here: "Andrew Stolper, Former Federal Prosecutor, Fends Off Critics of His Litigation-Finance Firm."
"Something happened," William J. Ruehle matter-of-factly tells UC Irvine law students, who spent Wednesday's lunch hour being mesmerized by the former Broadcom chief financial officer's dissection of his virtual lynching by overzealous federal prosecutors. That something was a 2006 report by a University of Iowa professor who suggested that a good place to look for securities fraud is a company that doles out huge stock options to employees before a massive re-stating of expenses. A company such as Broadcom.
The fabless semiconductor company has long enjoyed a special relationship with UC Irvine. Not only can you hit the corporate headquarters with a rock thrown from the outer edge of the campus near the 73, but the school of engineering is named after Broadcom co-founder Henry Samueli, who, along with his wife, established UCI Center for Integrative Medicine. Henry T. Nicholas III, the other Broadcom co-founder, has supported UCI's engineering school, Center for Pervasive Communications and Computing and Center for Embedded Computing Systems, and he established the Nicholas Prize that recognizes innovative collaborative research.
So what better place is there than a campus seminar room for Ruehle to rather dispassionately detail the hell his life went through, something he covers more extensively in his book, Mr. Ruehle, You Are a Free Man: My Fight for Justice? (Click here to watch the lecture online.)
The first half of the book title refers to words spoken to Ruehle by Judge Cormac J. Carney in the Ronald Reagan Federal Building and Courthouse in Santa Ana, but that's getting way ahead of the storyteller's harrowing tale.
On July 14, 2006, when the Tyco, Enron and Worldcom collapses were still fresh in everyone's minds, Broadcom announced it had to subtract $750 million from earnings due to stock-options irregularities. Two months later, the total doubled to $1.5 billion, and on Jan. 24, 2007, Broadcom announced a restatement of its financial results from 1998 to 2005 that totaled $2.22 billion. The financial world later coined a term for this: "backdating."
Broadcom was a company that used stock options as incentives to all employees, including its founders and CFO, so the backdating did not sit well with investors watching values sink. In May 2008, Samueli resigned as chairman of the board and took a leave of absence as chief technology officer after being named in a civil complaint by the U.S. Securities and Exchange Commission (SEC). The following month, Nicholas and Ruehle were indicted on charges of illegal stock-option backdating. (Nicholas was also indicted for violations of federal narcotics laws, allegations that also entered divorce proceedings that included claims he kept a sex dungeon on his estate.)
The outrageous allegations stood in stark contrast to Ruehle's words and demeanor while addressing the law students. He described multibillion-dollar Broadcom as "a very successful company" that took off shortly after he joined the then-6-year-old concern in 1997. The backdating warning report by Iowa business professor Erik Lie did not gain immediate traction, nor did a Wall Street Journal article based on the research. It was when a watchdog group later used the phenomenon to name 100 companies that may be up to no good that things went south for Broadcom, which made the list. Brokerage analysts and the SEC, then led by Chris Cox--who, as a congressman, represented a district that included Irvine--then piled on.
The resulting federal indictments, Ruehle said, made Broadcom out as the perpetrator of the "biggest crimes of all time." But he accused the crime fighters of looking at actions by the company that were perfectly acceptable when they happened through the prism (and new protection laws) of the post-Enron/Worldcom world. Hundreds of other companies also restated expenses and only a small percentage were prosecuted for wrongdoing, Ruehle noted.
He called Santa Ana-based federal prosecutor Andrew Stolper a minor player in the Enron case who decided to make Broadcom his Enron. Rather than building a case based on hard facts, Ruehle claimed, Stolper and his team hounded lower-level Broadcom officials to rat out "a couple of sacrificial lambs" to avoid being prosecuted or receive lighter sentences themselves.
Why Ruehle found himself on the wrong end of the strategy puzzles him because he claims he actually kicked off the investigations by immediately gathering and turning over to company attorneys all the financial information he could, under the belief Broadcom had done nothing wrong. Actually, that would wind up being some of the evidence used by federal prosecutors to try to hang him. That tactic by the feds also helped keep Ruehle out of the noose, but we're getting ahead of ourselves again.
It was under the advice of counsel that, Ruehle says, he left Broadcom before he, Nicholas, Samueli and company attorney David Dull were ultimately indicted. In the months before that happened, Ruehle says, he never talked with prosecutors, something that was later portrayed as not cooperating with the good guys. He was offered plea deals that could have sent him to federal prison for 10 years, but "I said, 'No, why would I do that?'" This flew in the face of most white-collar-crime cases, with defendants pleading guilty before trial 80 percent of the time. Of the 4 percent who choose to go to trial, 81 percent are ultimately found guilty, according to Ruehle, who said without emotion, "The odds are pretty awesome against you."
Ruehle rolled the dice anyway. He'd be hit by conspiratorial backdating allegations by two witnesses he had hired. As he related later in his lecture, "It was very difficult seeing people I know and trust and mentored get up there and testify against me." He called his 65-page indictment "incendiary rhetoric" that, unfortunately for him, was accompanied by being fingerprinted, having his mugshot snapped and being assigned a defendant number. There was no perp walk, however, and though Nicholas was put in a cell and had his tie and belt taken away so he would not hang himself, the magistrate denied the government's contention he was a risk to society and flight risk and granted him bail, something afforded Ruehle as well.
The former Broadcom official actually looks back at everyone he encountered during the prosecution--other than the prosecutors--of being friendly and professional. He ultimately would find not a greater champion than Carney, a "pretty colorful guy" who followed up a stellar receiving career with the UCLA Bruins football team with a year on the USFL's Memphis Showboats. Carney was later invited to the San Francisco 49ers camp, but the team that year also drafted a receiver named Jerry Rice, so the future judge accepted an offer from Harvard Law instead. He would receive judicial appointments from a despised governor and president -- Gray Davis and George W. Bush, respectively -- but Ruehle still regards Carney as "a wise man."
That's because Carney could see through a bullshit case.
What Ruehle and his attorneys believe opened the judge's eyes was a private meeting over a defense motion alleging government misconduct. Ruehle was 10 feet from the judge, who would ask him questions directly and, he believes, assessed the accused as "a straight shooter." The good rapport they developed helped his credibility and, Ruehle's attorneys told him, provided "the turning point" in the case.
But Carney at first declined to hear motions of prosecutorial misconduct on the grounds that Broadcom engaged in normal business practices that were twisted into criminal allegations through "strong-arm tactics."
At the jury trial, prosecutors accused Ruehle of lying to shareholders through backdating, relying on the same 15 to 20 emails to make their case. The ex-CFO contends phrases in the emails were taken out of context, and what was normal accounting under the security rules in place at the time were portrayed by the government as deceitful practices. Witnesses were well-coached to follow this narrative, according to Ruehle, who credits Carney with allowing long cross examinations by his attorneys because they had not previously been granted access to the accusers.
One of them, Broadcom shareholder-services manager Carol Prado, accused the man who hired her of continually ordering "backdating," but the term had not yet been coined when Ruehle was supposedly saying it. Another claim Prado made against him involved a 1998 meeting she had never before mentioned, according to court documents, until an eighth meeting with federal prosecutors. Hammered by Ruehle's attorneys over this, Prado claimed she had a "middle-of-the-night epiphany," something the formerly accused now says "didn't help her credibility."
Nancy Tullos, the former Broadcom vice president of human resources who went from Ruehle hire to Ruehle accuser, would also fall into the credibility gap during the trial. By then, she'd already been convicted of obstruction of justice over an email to a staffer that stated at the bottom "delete this email." (The former CFO sidebarred that it has nothing to do with securities fraud.) Ruehle's attorneys pointed out Tullos told the SEC stock options were dispersed by a committee composed of Nicholas and Samueli, but she was now testifying the decision was Ruehle's alone. Asked whether she lied to the SEC or federal prosecutors, Tullos answered she lied to the SEC.
Given the government's weak case, Ruehle's legal team had to decide whether to mount a defense at all. But given Carney's decision against entertaining the misconduct motion and the poor track record of motions to dismiss, it was decided the best they might hope for at this point without a defense was a hung jury, which would no doubt lead prosecutors to file for a new trial. The nightmare might not ever end, and, as Ruehle puts it, "We wanted to come clean here."
According to Ruehle, "To the government's chagrin," Carney granted immunity to defense witnesses David Dull, the former Broadcom attorney, and Samueli, who despite offering to plead out in exchange for probation and $12 million had never talked with prosecutors. Thus, nothing either said in their testimony in the Ruehle case could be used against them. That did not stop Stolper from calling Dull's attorney, warning the government could still prosecute Dull for perjury based on his testimony for Ruehle. But if Dull said the right things, Stolper added, he'd be treated to a "soft" cross examination by prosecutors.
Clearly a case of witness tampering, Dull's attorney and another drafted a letter to Carney, delivered the next morning. "He was outraged," Ruehle said of the judge, who outside the presence of the jury would put Stolper on trial. "My attorney got to cross examine the prosecutor," Ruehle said. "I kind of enjoyed that." The law students erupted in laughter.
Carney ruled Stolper could no longer speak in front of the jury. As "nasty" as Ruehle found the prosecutor, the former defendant conceded he knew the government's case better than anyone. Left in the hands of other prosecutors, the case sort of crumbled even more. Dull and Samueli, who'd already told their sides of the story to the SEC, proved to be strong witnesses for Ruehle. Even more important, they were "likable individuals, credible individuals." Asked on the stand what he thought when he was informed Stolper had contacted his lawyer, Dull choked up as he answered, "I was ashamed to be a lawyer at that point." Anaheim Ducks owner Samueli, who'd dealt with press reports he was not cooperating based on government leaks, said he'd "felt like he was dealing with the mafia" and being "strong-armed by my own government."
Carney had heard enough. After excusing the jury on a Thursday and with them not scheduled to reassemble until the following Thursday, the judge informed the defense they could re-file misconduct motions on Monday morning and that he would hold a hearing Tuesday morning. Over the weekend, Ruehle's legal team learned Carney had told the attorneys for Nicholas, Samueli and Dull to be in his court that Tuesday morning also.
Dec. 15, 2009, fell on the Bill of Rights Day. William Ruehle now calls it the Rights of Bill Day. He likened the atmosphere surrounding the Santa Ana courthouse to that of a "rock concert." The media filled the jury box. A video feed was set up for the overflow crowd. At the beginning of each court day, an IT guy would pull down a screen for displaying evidence, but the bailiff told him not to bother on this day.
Carney then came out, but, well, Ruehle's lecture slides best tell what happened next . . .
The judge then recited the words that would become the title to a book Ruehle had not yet written . . .
The media later questioned each juror, and not one said he or she would have voted against Ruehle, who reacted by taking the jury out to dinner. Hopefully, Nicholas and Samueli, two of the world's richest men who also had fraud and options backdating charges thrown out by Carney, helped to pick up the dinner tab.
Asked why the case had gone so far astray, Ruehle blamed the mentality to win at all costs, future political motivations and money--not in the form of bribes to prosecutors, but the knowledge that notching high-profile convictions will win them huge paydays once they leave the government for private practice.
By the way, an internal investigation of Stolper was announced, but as far as Ruehle can tell, nothing has come of it. The attorney's website used to claim he had never failed to get a conviction. Now it states he has never failed to get a conviction in a case that went to a jury.
As for the media crucifixion, Ruehle accused reporters of starting the whole mess with their stories, then automatically taking the side of prosecutors throughout the resulting litigation, as if to justify the stories they broke. He accused the press of "trying to do a hatchet job on Henry Samueli" through stories claiming he was not cooperating with prosecutors.
But Ruehle was pleased when a reporter who'd been hard on him, Michael Hiltzik of the Los Angeles Times, later interviewed him for a positive review of Mr. Ruehle, You Are a Free Man: My Fight for Justice--and faulted himself and others in the media with jumping into stories without first having all the facts. "I will give him high marks," Ruehle said of Hiltzik in that matter-of-fact tone.
More impassioned was the lecture participant who noted all the case's defense attorneys, themselves former prosecutors, said they were embarrassed to be lawyers by Stolper's actions, but that Carney's ruling restored their faith in the legal system.
UPDATE: Andrew Stolper, who left the U.S. Attorney's office earlier this year, steadfastly maintains to the Weekly he had a solid fraud case against Ruehle, who, the former prosecutor reminds, was fired by Broadcom for backdating.
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Stolper adds that he not only found U.S. District Court Judge Cormac Carney's ruling curious but so did other legal observers, up to and including other jurists.
But mainly, Stolper wants it made clear that his bosses at the Department of Justice investigated his handling of the case and found no wrongdoing.
This was before Stolper decided to leave the U.S. Attorney's office for greener pastures.