A federal judge Tuesday dismissed fraud and conspiracy charges in the stock-option backdating case against Broadcom Corp. co-founder Henry T. Nicholas III and former Chief Financial Officer William Ruehle because of prosecutorial misconduct.
U.S. District Judge Cormac J. Carney also asked prosecutors to explain why a separate drug indictment against Nicholas should not also be thrown out, and he dismissed a civil case the Securities and Exchange Commission filed against four Broadcom executives.
The stunning move came after Carney last week vacated a guilty plea by Broadcom co-founder Henry Samueli in the same case after hearing him testify for two days as a defense witness for Ruehle under a grant of immunity.
Carney found that prosecutors tried to prevent three key defense witnesses from testifying, improperly contacted attorneys for defense witnesses and leaked information about grand jury proceedings to the media.
"I find that the government has intimidated and improperly influenced the three witnesses critical to Mr. Ruehle's defense and the cumulative effect of that misconduct has distorted the truth-finding process and impeded the integrity of the trial," Carney said. "To submit this case to the jury would make a mockery ... of the constitutional right to due process and a fair trial."
The judge said Nicholas would need the same three defense witnesses to try to prove his own innocence, and because of that, he too could not receive a fair trial.
"You only have three witnesses to prove your innocence and the government has improperly intimidated ... each one of them. Is that fair? Is that justice?" Carney said. "I say, absolutely not."
Defense attorneys wept after the ruling as Samueli and Nicholas embraced nearby.
Outside court, Samueli called the decision "the ultimate vindication" for himself, Nicholas, Ruehle — and Broadcom. He said Carney's rulings restored his faith in the judicial system.
"I was holding my wife's hand, and I squeezed her hand, and tears just came to my eyes," he said.
Ruehle told reporters he was shocked the case was over.
"After all this time of being a defendant and being accused wrongly, it hasn't sunk in yet," he said. "Obviously it's a wonderful feeling."
Prosecutors left court without talking to reporters, but acting U.S. Attorney George Cardona told the judge he did not agree with the ruling. Prosecutors can appeal the dismissal of Nicholas' indictment, but Ruehle cannot be tried again because it would be double jeopardy.
Ruehle had pleaded not guilty to 14 counts of fraud and conspiracy in the high-profile investigation into stock option backdating at Irvine-based Broadcom, one of the most successful semiconductor developers in the world with nearly $5 billion in revenues last year.
Backdating involves retroactively setting a stock option's exercise price to a low point in the stock's value, boosting profits when the shares are sold. It is legal when properly accounted for, but if not properly disclosed it can allow companies to overstate profits and underpay taxes while diminishing shareholder value.
Prosecutors had alleged that the company's leadership conspired to conceal millions in compensation by awarding stock options to employees. Broadcom was ultimately forced to write down $2.2 billion in profits after the backdating was uncovered, and it paid $12 million to settle a civil complaint without admitting wrongdoing.
Ruehle's attorneys alleged that lead prosecutor Andrew Stolper leaked information about Samueli's 2007 grand jury appearance to reporters and contacted the attorneys of two other witnesses to try to influence their testimony.
One of those was former Broadcom general counsel David Dull, who was granted immunity to testify in Ruehle's case.
In a hearing away from the jury last week, Stolper acknowledged leaking information to the press and called it the "stupidest thing I have done in my career."
He has declined to comment outside court.
Carney tossed Samueli's guilty plea last week and dismissed a charge that the 55-year-old billionaire owner of the NHL's Anaheim Ducks lied to SEC investigators. The judge determined that Samueli did not commit the offense after the co-founder testified for two days for Ruehle's defense under a grant of immunity.
Nicholas was set for trial next year on two separate indictments, one alleging fraud and conspiracy in the backdating case, and the other involving federal drug charges.
Samueli and Nicholas started Broadcom in 1991 and took it public in 1998. The company grew to 7,000 employees worldwide and is a leading manufacturer for the chips used in everything from cable boxes to cell phones.