Embed Size (px)
Citation preview
1
2
3
4
5
6
7
8
9
10
11
12
13
14
15
16
17
18
19
20
21
22
23
24
25
26
27
28
Samuel D . Heins (admi tted pro hac vice)Stacey L . Mills (Cal . No. 109644)Bryan L . Crawford (admi tted pro hac vice)HEINS MILLS & OLSON, P .L.C .700 Northstar East608 Second Avenue SouthMinneapolis , Minnesota 55402Telephone : (612) 338-4605Facsimile : (612) 338-4692
Gretchen M. Nelson (Cal . No . 112566)Law Office of Gretchen M . Nelson707 Wilshire Boulevard, Suite 5000Los Angeles, California 90017Telephone : (213) 622-6469Facsimile: (213) 622-601 9
Attorneys for Lead Plaintiff
UNITED STATES DISTRICT COURT
CENTRAL DISTRICT OF CALIFORNIA
SOUTHERN DIVISION
IN RE BROADCOM CORP.SECURITIES LITIGATION
This Document relates to :
ALL ACTIONS
_ c
Master File No. SACV 0 1-275GLT(Eex)
(Consolidated Cases)
CLASS ACTIO N
SECOND CONSOLIDATEDAMENDED COMPLAINT FORVIOLATION OF SECURITIESEXCHANGE ACT OF 1934
JURY TRIAL DEMANDED
1
2
3
4
5
6
7
8
9
10
11
12
13
14
15
1 6
17
18
19
20
21
22
23
24
25
26
27
28
Lead Plaintiff Minnesota State Board of Investment ("MSBI" or "Lead
Plaintiff'), on behalf of itself and all others similarly situated, alleges the following :
EXECUTIVE SUMMARY
1 . This is a securities class action on behalf of all persons or entities who
purchased or otherwise acquired publicly traded securities of Broadcom
Corporation ("Broadcom" or the "Company"), or bought or sold options on
Broadcom stock, between July 31, 2000 and February 26, 2001 (the "Class Period")
and were damaged thereby (the "Class") . It is brought against Broadcom and
certain of its officers and directors for violations of the Securities Exchange Act o f
1934 (the "Exchange Act") .
2 . During the Class Period, Defendants represented Broadcom to be "the
fastest growing U .S . semiconductor company in history" and reported revenue
growth of 129% and 132% for the third and fourth quarters of fiscal 2000 ,
respectively, over the prior year, as well as sequential quarterly revenue growth of
30% and 18% . Given the importance of its revenue growth to analysts and
investors, existing and anticipated revenues were, by far, the most important
barometers by which Broadcom was measured . These representations were false
and misleading .
3 . As reflected in the chart below, Broadcom had reported sequential and
increasing revenue growth for the ten quarters prior to the start of the Class Period :
Broadcom Corporation Quarterly RevenueAs Reported
March 1998 - June 2000
$300
$250
$200
$150
$100
$50
$0
lp~?
. 'oP e0 ~' ~g9 gd°~' ~~5~ 'JCsfl
2
1
2
3
4
5
6
7
8
9
10
11
1 2
13
14
15
16
17
18
19
20
21
22
23
24
25
26
27
28
To continue and maintain this trend, Defendants misled investors as to the growth
of the Company's revenues and other financial performance indicators by failing to
properly disclose and account for the fact that the Company had committed t o
purchase material parts of its revenues by issuing millions of dollars worth o f
warrants to acquire Broadcom stock to customers of its newly acquired companies
in return for their orders . Some of the orders were for Broadcom products, no t
products of the acquired companies .
4 . During the Class Period, Defendants also represented that they wer e
engaged in a strategic, commercially-rational program of business acquisitions . In
fact, a principal purpose of the acquisitions was to provide an accounting pretext to
hide the use of Broadcom warrants to "buy revenue" from customers . By thi s
deception, Defendants sought to inflate the price of Broadcom stock whic h
depended, in large measure, on the Company' s ongoing revenue growth .
5 . As evidenced by the following Class Period analyst statements , the market
viewed Broadcom's revenue growth as an important factor driving its stock price :
• Chase, Hambrecht & Quist (Oct. 19, 2000) :
". . . Broadcom's accelerating revenue growth, war chest of newproducts ,
and string of recent acquisitions will likely drive additionalupside . We
rate BRCM shares BUY." (emphasis added) .
• S .G. Cowen Securities (Oct. 19, 2000) :
"Revenue growth of 30% Q//0 was double the 15% we wer e
expecting . Management indicated they believe the Company
has the best long-term outlook ever . . . . In a stock market that
3
1
2
3
4
5
6
7
8
9
10
1 1
12
13
14
1 5
16
17
18
19
20
21
22
23
24
25
26
27
28
accepts nothing out of quarterly earnings reports other than
undisturbed momentum and large estimate increases, BRCM' s
report should be among the well received ." (emphasis added) .
• Merrill Lynch (Jan. 24, 2001) :
"Broadcom reported 18% sequential revenue growth -
interestingly, management indicated that it saw strength acros s
all its product lines . We think the company deserves a lot o f
credit for beating our top line estimate while numerous othe r
semiconductor companies have reported disappointments ."
(emphasis added) .
6 . Broadcom's top officers and directors, including each of the Individua l
Defendants, had knowledge of Broadcom's growing inability to generate legitimate
sales and earnings growth to the extent they had led the market to expect - both by
its previous performance and their current representations - and were motivated to
conceal such problems . The slowing economy and potential decline in growth was
a critical challenge facing Broadcom in late 2000 and early 2001 . The maintenance
and continuation of Broadcom's growth was dependent on two factors : internal
growth and the acquisitions of other companies . Thus, Defendants sought to keep
the stock price high so as to make acquisitions less costly . The higher the price at
which Broadcom stock traded, the fewer number of shares or warrants Broadco m
would have to issue to make the acquisition .
7 . Broadcom realized that to sustain high rates of sales, it had to give its
customers substantial discounts. Straightforward price cuts, however, would resul t
in low sales figures for the same quantity of products . Consequently, Defendant s
4
2
3
4
5
6
7
9
10
11
1 2
13
14
15
16
17
18
19
20
21
22
23
24
25
26
27
28
created and implemented a scheme to increase sales as described herein . This
scheme was developed to create the illusion that Broadcom revenues were
increasing sequentially at record rates . Because Broadcom's rapidly increasing
share price was perhaps its most valuable corporate asset, Defendants sought to use
this asset to develop and increase revenues .
8 . Defendants could not directly trade Broadcom warrants for orders fro m
customers because that would not have provided Defendants with the opportunity
to capitalize the value of the warrants and account for them as "goodwill" on the
Company's balance sheet . Rather, as an accounting matter, a direct trade would
have required Defendants to offset as a cost of sale the value of the warrants against
the revenue Broadcom recognized (i .e., as volume sales discounts). Defendants
instead used Broadcom's acquisitions of other companies to manipulate the
exchange of its equity (warrants) for customer orders by including the value of the
warrants as part of the costs incurred in its acquisitions . This resulted in an
increased amount of goodwill, an asset that was not charged against operations, but
would be amortized over five years . By this accounting manipulation and
distortion, Defendants avoided and could avoid material charges against revenues
and earnings .
9. Defendants created and implemented this scheme through the acquisitions ,
during the Class Period, of at least five start-up companies : Allayer
Communications ("Allayer"), Altima Communications Inc . ("Altima"), Silicon
Spice Inc. ("Silicon Spice"), Sibyte Inc . ("Sibyte") and VisionTech, Ltd
("VisionTech") . The five companies, which each generated nominal revenues,
were purchased for hundreds of millions of dollars worth of Broadcom stock .
During the negotiations for the acquisitions, Broadcom directed (and/or directly
arranged for) these companies to seek agreements from their customers for future
product orders in return for warrants to purchase stock in the companies .
Broadcom agreed that it would (and it ultimately did) convert those warrants in the
1
2
3
4
5
6
7
8
9
10
11
12
13
14
15
16
17
18
19
20
21
22
23
24
25
26
27
28
acquisition company into warrants for its own stock . By directing these start-up
companies to issue warrants for purchase commitments, Broadcom sought to
increase its revenues, but avoid recording the costs of acquiring such sales, thus
misleading users of its financial and operating statements . Defendants knew tha t
the actual purpose of the transactions was to grant product purchase discounts to
customers of acquired companies using Broadcom's equity, and used form over
substance in their manipulation and distortion of Broadcom's accounting to concea l
this from investors. As set forth in the chart below and as described in greate r
detail herein, Broadcom was able to conceal the scheme through the issuance o f
false and misleading press releases announcing these acquisitions, making only
selective, vague, inconsistent, and confusing disclosures regarding the warrant
transactions in an ongoing effort to obfuscate the Company's financia l
performance :
Broadcom's Material Omissions During the Class Period Concerning Acquisition s
Acquisitions Disclosures Disclosure of Disclosure of Disclosure Disclosure of DisclosureRelating to Involvement Amount of of Value of Number of of ExerciseAcquisitions in Warrant Reduction in Warrants Shares Price o f
Negotiations Revenue if Issued to Reserved for Custome rAccounted for Customers Customer WarrantsProperly Warrant s
Altima 7/31/00 X (only on X8/14/00 11/14/00)9/8/0011/13/0 111/14/00
Silicon Spice 8/7/008/14/0010/6/0011/13/0011/14/00
Allayer 10/17/00 X11/14/00 (only on12/13/00 11/14/00 an d
12/13/00)SiByte 11/6/00 X
11/14/00 (only on 11/6/0012/18/00 and 11/14/00 )
VisionTech 11/28/001/5/0 1
10. Most, if not all, of the negotiations with customers of the acquisitio n
targets were conducted directly by representatives of Broadcom prior to the time
6
I
2
3
4
5
6
7
8
9
10
11
12
1 3
14
15
16
17
18
19
20
21
22
23
24
25
26
27
28
the acquisitions actually took place . In these negotiations, the acquisition target had
no substantive role . The acquisition was simply a sham by which Broadcom use d
warrants for its own stock to buy revenue. Broadcom representatives, including it s
co-founder, CEO and Co-Chairman, Henry T . Nicholas III, made clear to customer s
of the acquisition targets that warrants for the acquisition target stock would b e
converted to warrants for Broadcom stock . The warrants, with undisclosed exercise
prices ranging from less than a penny to 3 cents a share, were used to induce
customers to purchase product, including product not even of the acquisition target ,
but of Broadcom itself. In these circumstances, Defendants used the acquisitions a s
a subterfuge through which Broadcom could offer customers product discounts
without affecting Broadcom's profitability and thus deceive investors respecting th e
growth of Broadcom's revenues .
11 . In fact, Broadcom admitted after the close of the Class Period in its Form
10-K for fiscal 2000 that : "[Broadcom] presented these companies with the
concept of issuing performance-based warrants . . ." and that "[Broadcom] provide d
technical assistance and advice to each company's management to assure that th e
performance-based warrants would be structured to qualify for fixe d
accounting . . . . "
12. In total, the Company issued customers warrants for approximately 1 1
million shares of Broadcom stock. As reflected in the chart below, these warrants ,
at the time the acquisitions closed, were worth approximately $1 .5 billion :
Class Period Number of Per Share Fair Value* Value of SharesAcquisition Shares Rese rved Reserv e d
Altima 2,889,664 $238 .56 $ 689,358,243 .8 4Communications, Inc .Silicon Spice, Inc . 39,604 $227.31 $ 9,002,385 .24
Allayer 756,900 $142 .81 $ 108,092,889 .00Communication sSiByte, Inc . 1,841,679 $123 .13 $226,765,935 .27
Sub total : $1,033 , 219,453 .3 5
VisionTech Ltd . 5,714,270 $ 87 .00 $ 497,141,490.00
Total Number of 11 ,242,117 Total Value of Class AShares Rese rved Common Shares Reserved $1,530 , 360,943.35
*Per Broadcom's Form 10-K for fiscal year ended 12/31/00 except VisionTech . For VisionTech, value based on closing price ofBroadcom stock on date completion of acquisition announced .
7
1
2
3
4
13 . To put the magnitude of the value of the warrants in perspective, on e
needs only to compare the $1 .5 billion to the gross annual revenues of Broadco m
up to that point. As the chart below indicates, the value of the warrants dwarfe d5
6
7
8
9
10
11
12
13
14
15
16
17
18
1 9
20
21
22
23
24
25
26
27
28
Broadcom ' s annual revenues in each year of its existence :
GROSS REVENUES OF BROADCOM
Year 1996 $23,874,000
Year 1997 $42,341,000
Year 1998 $216,729,000
Year 1999 $521,225,000
Year 2000 $1,134,763,00 0
14 . In at least some cases, the value of the customer warrants far exceede d
the amount that Broadcom paid for the acquired company itself . During Septembe r
of 2000, for example, Broadcom paid $500 million in stock for Altima . However ,
warrants worth more than $689 million were issued to Altima's customers .
Similarly, the VisionTech acquisition involved the issuance of 7.96 million
Broadcom shares . However, VisionTech' s shareholders received only 2 .25 million
shares, while VisionTech's customers received warrants for over 5 .7 million shares ,
worth nearly $500 million at the time the acquisition closed . After the warrant
scheme was uncovered, Henry T . Nicholas III admitted, in an interview published
in The Street.com, deceiving the market through the use of VisionTech customer
warrants:
8
1
2
3
4
5
6
Shareholders thought Broadcom had bought onl y
technology but they didn't have to know that the
technology cost only $250 million [Nicholas] explains .
They didn 't have to know the company paid $500 million
for customer orders . If the market thinks Broadcom over7
8
9
10
1 1
1 2
13
14
15
16
17
1 8
1 9
20
21
22
23
24
25
26
27
28
paid for VisionTech, it can always bring down
Broadcom's share price . (emphasis added) .
15 . In addition to the implementation of the overall warrant scheme
described above, Broadcom did not account for these customer warrant transactions
in accordance with Generally Accepted Accounting Principles ("GAAP") . Under
GAAP, Broadcom was required to treat the warrants as unissued until they (a)
became exercisable upon the satisfaction by customers of their obligations under
the purchase and development agreements and (b) vested . Accordingly, the
warrants would then be recorded as a reduction of Broadcom's revenues (based on
the per share warrant fair values at the dates of the respective business
acquisitions), as and to the extent they are earned and vest in future periods .
Instead, the Company included the value of the warrants as part of the purchase
prices of the companies it acquired . This resulted in the creation of additional
goodwill, a balance sheet asset, and one typically considered extraneous to
operating performance by investors and financial analysts . It then amortized this
goodwill over a five-year period, regardless of the amount and timing of the
associated revenues earned from exercise of the warrants by customers . Thus, the
Company violated GAAP by prematurely recording the warrants and overstating
goodwill on its balance sheet instead of reducing revenue on its statement o f
operations as the warrants were earned and vested in future periods .
9
1
2
3
4
5
6
7
8
9
10
11
12
13
14
15
16
17
18
19
20
21
22
23
24
25
26
27
28
16 . In short, Broadcom's financial statements did not reflect the substance o f
these customer warrant transactions, and in the case of the fourth quarter 2000, did
not reflect its true revenues . By giving customers hundreds of millions of dollars in
warrants for Broadcom stock as an inducement for an undisclosed amount o f
orders, the Company was in reality heavily discounting its products to customers .
Customers like 3Com Corp . - which contributed 13% and 22% of the Company's
revenues for the third and fourth quarter of fiscal 2000, respectively - received
discounts as high as 68% on $360 million of product orders, factoring in the value
of the warrants it received in exchange . The Company's financial statements did
not disclose these deep discounts. As a consequence, Defendants' scheme was used
to (i) inflate current and future revenues and (ii) distinguish itself from the rest of
the faltering industry . For example :
• Broadcom Press Release (Nov. 9, 2000) : In response to marketplace concerns
over a reported downturn in the communication chip industry, Broadco m
issued a statement noting :
"Our business in broadband communications and enterpris e
networking chips continues to be strong, and nothing has
occurred to reduce our confidence since our third quarte r
earnings conference call ." (Defendant Nicholas) .
"Broadcom made the statement in light of the extraordinar y
market reaction this week in the wake of concerns expresse d
by some analysts regarding potential reduced demand in th e
current [4`''] quarter [20001 for certain communication s
chips." (emphasis added) .
10
1
2
3
4
5
6
7
8
9
10
11
12
13
14
15
16
17
18
19
20
21
22
23
24
25
26
27
28
• CNET News. com (Nov. 28, 2000 ) : In commenting on the VisionTech
acquisition under current industry conditions CNET News .com quoted
Nicholas :
"Despite all the market turbulence, our ability to go off an d
complete a strategic acquisition . . . it really demonstrates
the strength of our companies ."
• CNET News. com (Nov. 28, 2000) : Ina separate article, CNET News . com
interviewed Nicholas :
Nicholas added that a slow down in equipment orders fro m
AT&T's cable arm is having a bigger effect on th e
companies that make the cable infrastructure than it i s
having on those that make set-top boxes or components fo r
set-top boxes. "We haven 't seen any effect on box orders" ,
Nicholas said. "Our visibility is unchanged ."
• CNETNews.com (Jan. 23, 2001): In comparing Broadcom's fourth-quarter
2000 earnings to the industry, Nicholas stated :
"We beat the numbers again ," Henry Nicholas ,
Broadcom's CEO said in an interview. "Everyone's
blowing U. We aren't ." (emphasis added) .
17. As detailed in ¶¶ 139-172 herein, defendants' scienter is established by
evidence showing their awareness of the following material information which, i f
11
1
2
3
4
5
6
7
8
9
10
11
12
13
14
15
16
17
18
19
20
21
22
23
24
25
26
27
28
disclosed, would have corrected the false impression regarding Broadcom's current
and future revenue growth :
• That by giving its own customers and customers of acquisition targets ove r
$1 .5 billion in warrants for Broadcom stock as an inducement for an
undisclosed amount of orders, the Company was in reality heavil y
discounting its products to customers . As an immediate result, Broadcom' s
reported fourth quarter 2000 sales revenue was inflated by 10%, and its
future revenues from these customers would have to be heavily discounted .
• That Broadcom was able to meet market expectations for the fourth quarter
2000 by improperly treating the value of the warrants as goodwill rather tha n
a discount on revenues .
• That in connection with its acquisitions of Altima, Silicon Spice , Allayer ,
SiByte and VisionTech :
(i) Broadcom itself was conducting the warrant negotiations with
customers of the acquired companies, i .e., they were not picking up
warrant obligations that were in place between the acquisition targets
and their customers prior to the acquisitions ;
(ii) Because, inter alia, the warrants were not preexisting liabilities of th e
acquired companies they could not properly be considered part of th e
purchase consideration ;
12
I2
3
4
5
6
7
8
9
10
11
12
13
14
15
16
17
18
19
20
21
22
23
24
25
26
27
28
(iii) Broadcom's revenue had been and would be reduced materially as a
result of the warrants issued to the acquired companies' customers if
Broadcom accounted for them in accordance with GAAP ;
(iv) The value of the warrants issued to customers was approximately $1 .5
billion, 35% more than Broadcom's entire revenue for 2000 ; and
(v) The undisclosed exercise price of the warrants ranged from less than a
penny to 3 cents a share .
18. Contrary to its representations, therefore, Broadcom's financia l
statements were not prepared in accordance with GAAP . In fact , its financial
statements were materially false and misleading . According to one analyst, its
revenue growth was substantially overstated, perhaps by as much as 50% . As a
result, during the Class Period, the Company's stock price was artificially inflated ,
causing harm and damage to class members .
19 . Each of the Individual Defendants personally profited from the inflate d
stock prices, selling (either individually or through entities they beneficially owned )
over $390 million of Broadcom stock during the Class Period .
20. On February 27, 2001, the first day following the close of the Clas s
Period, after Defendants had completed numerous major acquisitions an d
significant insider selling, The Wall Street Journal published an article questioning
Broadcom's accounting treatment for its revenue and warrant arrangements . In the
wake of the adverse facts disclosed in that article, the Company's stock price fell
nearly 15%. Broadcom stock, $63 per share a day earlier, fell to $53 .62 per share
on February 27, 2001, on unusually heavy volume . The stock subsequently fell as
low as $41 per share on March 1, 2001 .
13
1
2
3
4
5
6
7
8
9
10
11
12
13
14
15
16
17
18
1 9
20
21
22
23
24
25
26
27
28
21 . After the truth regarding Broadcom's warrant-related accounting was
revealed, Broadcom changed its method of accounting for the five acquisitions at
issue. This required Broadcom to restate its financial statements for third quarter
2000 and reduce its previously reported fourth quarter 2000 sales revenue by 10%,
or $38 .6 million. The fourth quarter revision lowered Broadcom's revenue for th e
quarter to $340.2 million and sequential quarterly revenue growth from 18.6% to
6.5%. Significantly, these revised figures were below market expectations for the
quarter .
JURISDICTION AND VENUE
22 . The claims asserted herein arise under Sections 10 (b) and 20 (a) of th e
Exchange Act, 15 U .S .C . § 78j(b), and Rule IOb-5, promulgated thereunder by th e
Securities and Exchange Commission ("the SEC") .
23 . This Court has jurisdiction over the subject matter of this litigatio n
pursuant to Section 27 of the Exchange Act and pursuant to 28 U.S.C. §§ 1331 and
1337 .
24. Venue is proper in this District pursuant to Section 27 of the Exchang e
Act and 28 U.S.C. § 1391(b). Many of the acts and transactions giving rise to th e
violations of law complained of herein, including the preparation and disseminatio n
to the investing public of materially false and misleading financial statement s
occurred in this District . In addition, at all times relevant hereto, Broadcom
maintained its principal executive offices in this District, at 16215 Alton Parkway ,
Irvine, California 92619-7013 .
14
1
2
3
4
5
6
25 . In connection with the acts, conduct and other wrongs complained of
herein, Defendants, directly or indirectly, used the means and instrumentalities o f
interstate commerce, the United States mails, and the facilities of a nationa l
securities market .
THE PARTIES7
8
9
1 0
1 1
12
13
14
15
1 6
17
18
19
20
21
22
23
24
25
26
27
28
26. By Order dated June 11, 2001, this Court appointed the MSBI as Lea d
Plaintiff. The MSBI is an agency established by Article XI of the Minnesota
Constitution and laws of the State of Minnesota for the purpose of administerin g
and directing investment of all state funds and pension funds . The funds managed
by the MSBI include : the Basic Retirement Funds, the Post Retirement Fund, the
Supplemental Investment Fund, the Permanent School Fund, the Environmenta l
Trust Fund, the Assigned Risk Plan and the State Cash Accounts . As of June 2000 ,
the MSBI had approximately $52 .3 billion dollars in funds under management . The
MSBI acquired 216,590 shares of Broadcom stock during the Class Period an d
sustained losses of over $21 million dollars in connection with those purchases .
27 . The persons and entities listed on Schedule A annexed hereto are
additional plaintiffs in this action . During the Class Period each acquired securitie s
of Broadcom at the prices listed in the certifications filed with their respectiv e
initial complaints and suffered damages as a result of Defendants' violations of law .
28. Broadcom is a California corporation with its principal place of busines s
in Irvine, California . Broadcom purports to be a leading provider of highly
15
1
2
3
4
5
6
7
8
9
10
1 1
12
13
14
1 5
16
17
18
1 9
20
21
22
23
24
25
26
27
28
integrated silicon solutions that enable broadband digital transmission of voice ,
video and data. The Company claims that its integrated circuits permit the cos t
effective delivery of high speed, high-bandwidth networking using existin g
communication infrastructures that were not originally designed for th e
transmission of broadband digital content . Broadcom states that it designs ,
develops and supplies integrated circuits for a number of the most significan t
broadband communication markets, including the markets for cable set-top boxes ,
cable modems, high-speed local, metropolitan and wide area networks, hom e
networking, gateways, direct broadcast satellite and terrestrial digital broadcast ,
optical networking, digital subscriber lines and wireless communications .
29. Defendant Henry T . Nicholas, III ("Nicholas"), is co-founder o f
Broadcom and, at all relevant times , was the Company's Chief Executive Officer ,
President and Co-Chairman of the Board. As President and CEO, Nicholas i s
responsible for the strategic direction of the Company, the business developmen t
and the management of day-to-day operations . Nicholas was also one of the largest
shareholders of the Company, exercising ownership or control over 33 millio n
shares of Broadcom Class B common stock, or approximately 43% of the
Company's Class B common stock outstanding . While not publicly traded, each
share of Broadcom's Class B common stock is convertible at any time at the optio n
of the holder into one share of Class A common stock and is automaticall y
converted upon sale and most other transfers . Moreover, while Class A common
16
1
2
3
4
5
6
7
8
9
10
11
12
13
14
15
1 6
17
18
19
20
2 1
22
23
24
25
26
27
28
stock is entitled to one vote per share, holders of Class B common stock receive ten
votes per share . Thus, as of March 30, 2001, Nicholas held 35% of the Company' s
total voting power . During the Class Period, while in possession of materia l
adverse information about Broadcom's business, Nicholas sold 1,204,154 shares o f
Broadcom Class A common stock on the open market for proceeds of over $18 8
million.
30. Defendant Henry Samueli ("Samueli") is co-founder of Broadcom and, a t
all relevant times, was the Company's Vice President-Research & Development ,
Chief Technical Officer and Co-Chairman of the Board . As Chief Technical
Officer, Samueli is responsible for all research and development activities of th e
Company. Samueli was also one of the largest shareholders of the Company ,
exercising ownership control over 33 million shares of Broadcom Class B common
stock, or approximately 43% of the Company's Class B common stock outstandin g
and 35% of the total voting power, as of March 30, 2001 . During the Class Period ,
while in possession of material adverse information about Broadcom's business ,
Samueli sold 1,202,154 shares of Broadcom Class A common stock for proceeds o f
over $188 million .
31 . Defendant William J . Ruehle ("Ruehle") was at all relevant times Vic e
President and Chief Financial Officer of Broadcom . As Chief Financial Officer ,
Ruehle is responsible for overseeing the long-term financial development of th e
Company, interfacing with the financial community and managing the Company' s
17
1
2
3
4
5
6
7
8
9
10
11
12
13
14
15
16
17
18
19
20
2 1
22
23
24
25
26
27
28
internal financial and administrative operations . Ruehle's position at Broadco m
was thus central to the Company's fraudulent revenue growth scheme . Ruehle is
reported to have an undergraduate degree in economics from Allegheny College
and an M.B .A. from Harvard Business School. Ruehle was expressly designated as
the Broadcom financial analyst contact on each of the false and misleadin g
Broadcom press releases discussed herein, including, but not limited to, each
Broadcom announcement relating to the acquisitions of Allayer, Altima , Silicon
Spice, SiByte and VisionTech . Ruehle also signed the false and misleading SEC
filings detailed herein, including Broadcom's Form 10-Q's for the second and third
quarters of 2000 and Form 8-Ks relating to the Class Period acquisition
announcements . During the Class Period, while in possession of material advers e
information about Broadcom's business, Ruehle sold 65,000 shares of Broadcom
Class A common stock for proceeds of over $14 million .
32 . Nicholas, Samueli and Ruehle (sometimes collectively referred to herei n
as the "Individual Defendants") designed and implemented the entire schem e
alleged herein whereby Broadcom purchased revenues from the customers of the
acquired companies . Each Individual Defendant was involved in the negotiations
relating to Broadcom's acquisitions of Allayer, Altima, Silicon Spice, Sibyte an d
VistionTech. This involvement included negotiations (directly or indirectly) with
customers of the acquired companies for purchase commitments in exchange for
warrants, the review and approval of Company press releases in connection with th e
18
1
2
3
4
5
6
7
8
9
10
11
12
13
14
15
16
17
18
19
20
21
22
23
24
25
26
27
28
announcements pertaining to the acquisitions and the methods by which Broadcom
accounted for the acquisitions . Each Individual Defendant was involved in
negotiating the terms of the acquisition agreements , which were signed by Nicholas
and incorporated into Company Form 8-Ks signed by Ruehle and filed with th e
SEC. According to the Broadcom press releases, each acquisition was reviewed
and approved by the Broadcom Board of Directors . Nicholas and Samueli served
as a Co-Chairman of the Board at all times.
33 . Nicholas, Samueli and Ruehle are controlling persons of Broadco m
within the meaning of Section 20 of the Exchange Act by reason of their position s
with and/or their extensive stock ownership in the Company . Each of the
Individual Defendants were involved in the day-to-day activities of Broadcom an d
had access to the material undisclosed information about Broadcom's business ,
revenue growth trends, financial statements, accounting practices, and present and
future business prospects via access to internal corporate documents, conversation s
with other corporate officers and employees, attendance at management and/o r
board of directors meetings and committees thereof and via reports and other
information provided to them in connection therewith . The Individual Defendants
had a material role in drafting, reviewing and/or disseminating the false and
misleading statements and information alleged herein, were aware, or recklessly
disregarded, that the false and misleading statements were being issued regarding
the Company, and approved or ratified these statements, in violation of the federal
19
1
2
3
4
5
6
7
8
9
10
11
12
13
14
15
16
17
18
19
20
21
22
23
24
25
26
27
28
securities laws. Each of the Individual Defendants engaged in the unlawful practic e
of selling their Broadcom stock while in possession of undisclosed adverse
information about Broadcom . The Individual Defendants engaged in the common
course of conduct complained of herein from at least July 31, 2000 - the day the
Company issued a press release announcing the acquisition of Altima - the purpos e
of which was to artificially inflate the market price of Broadcom common stock
through the issuance of materially false and misleading statements to the public .
34. It is appropriate to treat the Individual Defendants as a group fo r
pleading purposes and to presume that the false, misleading and incomplete
information conveyed in the Company's SEC filings, press releases and othe r
publications alleged herein are the collective actions of the narrowly defined group
of defendants identified above. Nicholas, Samueli and Ruehle, by virtue of their
high level positions at all material times with the Company, participated in th e
management of the Company, and were privy to confidential, proprietary
information concerning the Company and its business, operational trends, growth ,
financial statements, accounting practices and financial condition . Broadcom' s
Form 10-Q for the third quarter 2000 expressly states that Nicholas and Samueli
control company management and have control over any merger or acquisition
decision :
Accordingly, [Nicholas and Samueli] currently have enough
voting power to control the outcome of matters that require th e
20
1
2
3
4
5
6
7
8
9
10
11
12
13
14
15
16
17
18
19
20
21
22
23
24
25
26
27
28
approval of our shareholders . These matters include the
election of the majority of our board of directors, the issuance
of additional shares of Class B common stock, and the approval
of most significant corporate transactions, including a merger,
consolidation or sale of substantially all of our assets . In
addition , these insiders currently also control the managemen t
of our business. Because of their significant stock ownership ,
we will not be able to engage in certain transactions without the
approval of these shareholders . These transactions include
proxy contests, mergers . . . .
Defendants' own statements are further evidence of such direct participation :
(a) At Broadcom, as Mr . Nicholas makes clear, "I run the show ."
(emphasis in original) . (NYTimes . com, June 25, 2000) .
(b) "The military had an influence on my management style, bu t
I'm more of a hands-on manager, not a micromanager ." (Nicholas)
(Electronics Buyers' News (EBN) Online, December 18, 1998) .
(c) "I think what I've brought is a no-nonsense , execution-oriente d
management style that focuses more on results than on the means of getting
there. . . ." (Nicholas) (Forbes.com, December 11, 2000) .
(d) "You could describe my (management) approach as scorche d
earth . . . I believe I am an understanding person, unfortunately the marke t
21
1
2
3
4
5
6
7
8
9
10
11
12
13
14
15
16
17
18
19
20
21
22
23
24
25
26
27
28
isn't understanding . It can be brutal, but my job is to make sure that ou r
employees are ready to take on the sacrifices in their lives that will b e
necessary to win. We expect to be No . I in everything we do." (Nicholas
interview with Electronics Buyers' News (EBN) Online) (reported in Chick's
Eye View In Focus, February 15, 2001) .
(e) Nicholas runs the business side of the company; he spearheads
the acquisition strategy and pushes his lieutenants to get things done, holdin g
staff meetings that can run past midnight . (Bloomberg Markets, January
2001).
(f) Both Nicholas and Samueli believe the ongoing success has
been possible because the two were able to accurately chart their plan for th e
company and the road map it would follow, and then keep to that model wit h
little deviation . (Electronics Buyers ' News, (EBN) Online , December 20 ,
2000) .
(g) In his role overseeing R & D, Samueli makes much of the early
contact with companies and individuals developing new technologies an d
attempting to establish themselves in new markets . In most cases , before
Broadcom acquired any of the companies, Samueli had spent a year or mor e
working with them in the background . . . . "I'm on the front line of defense .
I do some initial filtering to make sure it's something we want to pursue ."
Nicholas, as President and Chief Executive, ultimately helps make the call
22
1
2
3
4
5
6
7
8
9
10
11
12
1 3
14
15
16
1 7
1 8
19
20
21
22
23
24
25
26
27
28
with Samueli on when and if to pull the trigger on an acquisition . (Samueli )
(Electronics Buyers 'News, (EBN) Online , December 20, 2000) .
35 . The Individual Defendants, because of their positions of authority a s
officers and/or directors of the Company, were able to and did control the content
of the various SEC filings, press releases and other public statements pertaining t o
the Company during the Class Period . Each Individual Defendant was provide d
with copies of the documents alleged herein to be misleading prior to or shortl y
after their issuance and/or had the ability and/or opportunity to prevent thei r
issuance or cause them to be corrected . Each of the Individual Defendants i s
therefore primarily liable for the representations contained therein .
36 . Each of the Individual Defendants is liable as a participant in thi s
fraudulent scheme and course of business as a fraud or deceit on purchasers of
Broadcom publicly traded securities by inflating the price of the Company' s
common stock and concealing material adverse facts concerning the Company' s
business and financial condition . The scheme: (i) deceived the investing publi c
regarding Broadcom's business, revenue growth, management and intrinsic value o f
Broadcom's publicly traded securities ; (ii) provided the means for the Individual
Defendants to sell more than $390 million of their Broadcom stock to th e
unsuspecting public ; (iii) enabled the Company to acquire other companies using
Broadcom stock at terms favorable to Broadcom, thereby creating the illusion of
continuous revenue growth; (iv) enhanced the value of the Individual Defendants '
23
1
2
3
4
5
6
7
8
9
10
11
12
13
14
15
16
17
18
19
20
21
22
23
24
25
26
27
28
extensive Broadcom securities holdings ; and (v) caused plaintiffs and other
members of the Class to purchase Broadcom publicly traded securities at artificiall y
inflated prices.
37. At all relevant times, each Defendant was and is the agent of each of the
remaining Defendants, and in doing the acts alleged herein, was acting within th e
course and scope of such agency . Each Defendant ratified and/or authorized the
wrongful acts of each of the Defendants .
CLASS ALLEGATION S
38 . Lead Plaintiff brings this action on its own behalf and as a class action
pursuant to Rules 23(a) and 23(b)(3) of the Federal Rules of Civil Procedure on
behalf of a class of all persons or entities who purchased or otherwise acquire d
publicly traded securities of Broadcom, or bought or sold options on Broadco m
stock, during the Class Period and who were damaged thereby . Excluded from the
Class are (i) Defendants ; (ii) members of the immediate families of each Individua l
Defendant; (iii) any person who was an officer and/or director of the Company; (iv)
parents, subsidiaries and affiliates of the Company ; and (v) the legal
representatives, heirs, successors or assigns of any such excluded party .
39 . Shares of Broadcom Class A common stock were actively traded on th e
Nasdaq National Market System ("NASDAQ") throughout the Class Pe riod. The
NASDAQ is an efficient market . As of April 18 , 2001, Broadcom had over 259
million shares of Class A common stock issued and outstanding. Members of the
24
1
2
3
4
5
6
7
8
9
10
Class are so numerous that joinder of all members is impracticable . While the exact
number of Class members can only be determined by appropriate discovery, Lea d
Plaintiff believes that Class members number in the thousands .
40. Lead Plaintiff s claims are typical of the claims of the members of the
Class . Lead Plaintiff and all other members of the Class acquired shares o f
Broadcom Class A common stock during the Class Period and sustained damage s
as a result of Defendants' wrongful conduct complained of herein .
41 . Lead Plaintiff will fairly and adequately protect the interests of the othe r1 1
1 2
1 3
14
15
16
17
1 8
19
20
21
22
23
24
25
26
27
28
members of the Class and has retained counsel competent and experienced in clas s
and securities litigation .
42 . A class action is superior to other available methods for the fair an d
efficient adjudication of this controversy. Because the damages suffered by
individual Class members may be relatively small, the expense and burden o f
individual litigation make it virtually impossible for the Class members individuall y
to seek redress for the wrongful conduct alleged herein.
43 . Common questions of law and fact exist as to all members of the Clas s
and predominate over any questions affecting solely individual members of th e
Class. Among the questions of law and fact common to the Class are :
(a) Whether the federal securities laws were violated by Defendants'
acts as alleged herein ;
25
1
2
3
4
5
6
7
8
9
1 0
11
12
13
14
1 5
16
17
18
19
20
21
22
23
24
25
26
27
28
(b) Whether Defendants misstated the Company's financial results in
documents, press releases, public statements, and filings with the SEC, in direc t
contravention of GAAP;
(c) Whether the documents, press releases and public statement s
made, authorized and/or approved by Defendants contained materia l
misrepresentations or omitted to state material information concerning the business
and finances of Broadcom ;
(d) Whether Defendants acted with the requisite state of mind in
misrepresenting material facts ;
(e) Whether the market price of Broadcom Class A common stock
during the Class Period was artificially inflated due to the material omissions an d
misrepresentations complained of herein ; and
(f) Whether the members of the Class have sustained damages and, i f
so, the appropriate measure thereof.
44. Lead Plaintiff knows of no difficulty that will be encountered in the
management of this litigation that would preclude its maintenance as a class action.
45 . The names and addresses of the record owners of Broadcom Class A
common stock purchased or otherwise acquired during the Class Period are
available from the Company's transfer agent(s) . Notice can be provided to such
record owners via first class mail using techniques and a form of notice similar to
those customarily used in class actions .
26
1
2
3
4
5
6
7
8
9
10
11
12
13
14
15
16
1 7
18
19
20
21
22
23
24
25
26
27
28
DEFENDANTS' FALSE STATEMENTS AND MATERIAL OMISSION S
46 . Broadcom experienced remarkable growth during 1999 to mid-2000 . Its
stock price rose from below $50 to above $260 during the Class Period .
Broadcom's tremendous growth was influenced by the number of start-up
companies which the Company purchased with its stock, purportedly to allow the
Company to complement its existing product offerings, expand its market coverage
and enhance its technological capabilities . Since January 1999, Broadcom has
issued over 60 million shares to buy 18 companies . Most of these acquisitions
involved relatively new companies, with little revenue, for which Broadcom paid
enormous prices . Broadcom purchased all of the start-up companies with Company
stock. A review of Broadcom's string of acquisitions reveals that the warrant
scheme was not used for any of the 10 acquisitions made by Broadcom in the 12
months preceding the Class Period . The warrant scheme was implemented in July,
2000 at the start of the Class Period, only after it became apparent to Defendants
that Broadcom would be unable to legitimately continue its pattern of revenue
growth. During the July 31, 2000 to February 26, 2001 Class Period, Defendants
made the following chronological representations :
47. On July 31, 2000, Broadcom issued a press release announcing it had
signed an agreement to acquire Altima :
Broadcom Corporation (Nasdaq:BRCM), the leading provider of
integrated circuits enabling high speed broadband
communications to and throughout the home and business, today
announced that it has signed a definitive agreement to acquire
Altima Communications, Inc ., a leading supplier of networking
integrated circuits (ICs) for the small-to-medium business
(SMB) networking market .
The acquisition of Altima will substantially accelerate
Broadcom's penetration of the fast growing SMB equipment
27
1
2
3
4
5
6
7
8
9
1 0
11
12
13
14
15
16
17
18
1 9
20
21
22
23
24
25
26
27
28
market. According to The Dell'Oro Group, the SMB market fo r
10/ 100 switches and hubs is forecasted to grow by well over
100% this year, and to reach 58 million ports by 2001 .
Altima's existing customer base is predominantly in Asia, wher e
the majority of SMB manufacturers reside . To best address the
unique product and support requirements of its Asian customers,
Altima has built a strong team of engineers and customer
support personnel in Taiwan, part of a larger engineering team
that brings to Broadcom significant additional experience an d
expertise in mixed signal IC design and Ethernet networking .
"Altima's well-established infrastructure in Asia will strengthen
Broadcom's presence and enable us to better serve our
customers engaged in the high-growth SMB market segment,"
said Dr. Henry T. Nicholas III, President and CEO of
Broadcom. "Like Broadcom, Altima has established a track
record for rapidly designing and ramping to volume production
products that meet the requirements of its target market. As a
result of Altima's complementary market focus and engineering
execution, we will inherit a non-overlapping revenue stream . "
In connection with the acquisition , Broadcom will issue in
aggregate about 2 .5 million shares of its Class A Common Stock
(valued at about $533 million based upon the closing price on
the Nasdaq National Market (R) on July 28, 2000) in exchang e
28
1
2
3
4
5
6
7
8
9
10
11
12
13
14
1 5
16
17
18
1 9
20
21
22
23
24
25
26
27
28
for all outstanding shares of Altima Preferred and Common
Stock and upon exercise of outstanding employee stock options
of Altima. The merger transaction is expected to close within
60 days and will be accounted for under the purchase method of
accounting. The boards of directors of both companies have
approved the merger, which awaits approval by Altima's
shareholders and the satisfaction of regulatory requirements and
other customary closing conditions . Broadcom expects to
record a one-time write-off for purchased in process research
and development expenses related to the acquisition in its third
fiscal quarter (ending September 30) . In addition to the
purchase consideration, Broadcom will reserve up to 2 .9 million
shares of its Class A Common Stock for future issuance upon
exercise of outstanding Altima performance-based warrants that
become exercisable upon satisfaction of certain customer
purchase requirements .
The press release expressly designated Ruehle as the contact person for
related inquiries from the financial community .
48 . The July 31, 2000, announcement was false and misleading because i t
failed to disclose that, by giving Altima customers hundreds of millions of dollars
in warrants for Broadcom stock as an inducement for an undisclosed amount of
orders, Broadcom was heavily discounting its products to customers . More
specifically, Broadcom failed to disclose in this announcement (1) its direct
involvement in the warrant negotiations with Altima's customers; (2) the amount of
reduction in the revenue to Broadcom which would occur as a result of the warrants
issued to Altima customers if accounted for properly ; and (3) the value of the
warrants issued to customers . Broadcom was engaged in a scheme to use th e
29
1
2
3
4
5
6
7
8
9
10
11
12
1 3
14
15
16
1 7
1 8
19
20
21
22
23
24
25
26
27
28
acquisition of Altima to manipulate the exchange of its equity for customer orders
without ultimately accounting for the effect of the issuance of the warrants on the
Company 's revenue in accordance with GAAP . Broadcom's scheme misled th e
investing public as to Broadcom's true revenues and future revenue growth .
49. The July 31, 2000 announcement was incorporated in a Form 8-K signe d
by Ruehle and filed by Broadcom with the SEC on August 4, 2000 .
50 . Analysts, unaware of the amount of reduction in the revenue t o
Broadcom which would occur as a result of the warrants issued to Altima
customers if accounted for properly, painted the Altima acquisition in a positiv e
light . On July 31, 2000, Merrill Lynch issued a repo rt on Broadcom which forecas t
2000 and 2001 EPS of $.92 and $1 .27. It also stated :
• Broadcom announced it was acquiring Altima for 2.5 million shares
or about $530 million . Altima is a developer of physical laye r
(PHYs), repeaters and switching products, with good exposure to
Asian markets .
• We believe the acquisition will be slightly accretive . We
view the acquisition positively, as Altima brings :
1 . Exposure to Asia - We estimate that Asian
manufacturers account for 15-20% of the total Ethernet
ports ships, and Altima's customers include the major
manufacturers such as DLINK, Acton and Netgear . We
believe that Altima has significant longterm contract s
with its customers . (emphasis added) .
30
I1
2
3
4
10
11
12
13
14
15
16
17
18
19
20
21
22
23
24
25
26
27
28
The number of shares includes options that Broadcom
uses to motivate employees to stay . We note that Broadcom has
had unprecedented success in keeping key employees from
acquisitions - not one CEO from any of its acquisitions has left .
51 . Similarly, press reports on the Altima acquisition served as a means for
Broadcom to mislead the investing public as to the real value of the acquisition . On
August 1, 2000, The Wall Street Journal reported :
Terms call for Broadcom to exchange 2 .5 million shares of
its Class A common stock for all outstanding shares and
options of Altima . Broadcom also said it would hold an
additional 2 .9 million shares in reserve and issue the shares
depending on Altima's future performance . (emphasis
added) .
52 . On August 1, 2000, quoting Nicholas, The Orange County Register also
reported on the Altima acquisition :
Despite the high price tag, Nicholas called the deal a
bargain .
"My belief is that it's worth twice that," Nicholas said .
* * *
"What it gets Broadcom is a new group of customers in
Asia," said Cynthia Brumfield, president of Broadban d
Intelligence Inc., an industry research firm. "They don' t
have to go to the trouble of developing this (networking )
niche of the market, but my guess is they probably ar e
31
1
2
3
4
5
6
7
8
9
10
11
12
13
14
15
16
17
18
19
20
21
22
23
24
25
26
27
28
aiming much more at acquiring this particular customer
base."
53 . On August 7, 2000 , Broadcom issued a press release stating it would
acquire Silicon Spice, a leading developer of gateway and carrier access chipsets :
In connection with the acquisition, Broadcom will issue in
aggregate about 5.0 million shares of its Class A Common
Stock in exchange for all outstanding shares of Silico n
Spice Preferred and Common Stock and upon exercise o f
outstanding employee stock options, warrants and other
rights of Silicon Spice . The merger transaction is expected
to close within 60 days and will be accounted for under the
purchase method of accounting . The boards of directors o f
both companies have approved the merger, which awaits
approval by Silicon Spice's shareholders and the
satisfaction of regulatory requirements and other customary
closing conditions. Broadcom expects to record a one-time
write-off for purchased in-process research an d
development expenses related to the acquisition in its thir d
fiscal quarter (ending September 30) .
The press release expressly designated Ruehle as the contact person
for related inquiries from the financial community.
32
1
2
3
4
5
6
7
8
9
10
11
12
13
14
15
16
17
18
19
20
21
22
23
24
25
26
27
28
54. The August 7, 2000 announcement was false and misleading because i t
failed to disclose that, by giving Silicon Spice customers millions of dollars i n
warrants for Broadcom stock as an inducement for an undisclosed amount o f
orders, Broadcom was heavily discounting its products to customers . More
specifically, Broadcom failed to disclose (1) its direct involvement in the warran t
negotiations with Silicon Spice's customers ; (2) the amount of reduction in th e
revenue to Broadcom which would occur as a result of the warrants issued to
Silicon Spice customers if accounted for properly ; and (3) the value of the warrant s
issued to customers . In fact, Broadcom's announcement of the Silicon Spic e
acquisition failed to even reference the number of shares which had been rese rved
for issuance to customers . Broadcom was engaged in a scheme to use th e
acquisition of Silicon Spice to manipulate the exchange of its equity for customer
orders without ultimately accounting for the effect of the issuance of the warrant s
on the Company 's revenue in accordance with GAAP . Broadcom's scheme misled
the investing public as to Broadcom's true revenues and future revenue growth .
55 . The August 7, 2000 announcement was incorporated in a Form 8- K
signed by Ruehle and filed by Broadcom with the SEC on August 9, 2000 .
56 . Similar to the Altima acquisition, press reports on the Silicon Spic e
purchase served as a means for Broadcom to mislead the investing public as to the
real value of the acquisition . In an article dated August 7, 2000, CNN Financial
Network reported :
33
1
2
3
4
5
6
7
8
9
10
11
12
13
14
15
16
17
18
19
20
21
22
23
24
25
26
27
28
Irvine, Calif.-based Broadcom will issue five million of its
shares for all the preferred and common stock of privatel y
held Silicon Spice . Based on the Broadcom closing pric e
Friday of 238-15/16, the deal is worth about $1 .2 billion .
(emphasis added) .
57. On August 7, 2000, CNET News . com also noted :
Broadcom chief executive Henry Nicholas said Spice' s
architecture for communications processors, which enable s
banks of chips to be replaced with a single piece of silicon, is
Broadcom's most strategic buy yet and opens a "multi billion-
dollar" opportunity .
The deal, which is expected to close in the third quarter, wil l
initially dilute earnings for Irvine , Calif.-based Broadcom but
should add to them within a year, Nicholas said .
Broadcom chief technical officer Henry Samueli tol d
CNETNews .com earlier this year that the company would
continue aggressively buying companies as it looks to double it s
employee headcount in 2000, as it did in 1999 .
34
1
2
3
4
5
6
7
8
9
10
11
12
13
14
15
16
17
18
19
20
21
22
23
24
25
26
27
28
Nicholas would not say how many people the company will add
this year but added "we don't see our growth abating ."
58 . Analysts, unaware of the amount of reduction in the revenue t o
Broadcom which would occur as a result of the warrants issued to Silicon Spic e
customers if accounted for properly, commented favorably on the Silicon Spic e
acquisition. W.R. Hambrecht & Co ., in its August 7, 2000 report, noted :
This is Broadcom's largest acquisition, and one of the
Company's most strategic, in our opinion. . . . We estimate
the total available market for the Silicon Spice product lin e
is about $750 million dollars in 2001 . (emphasis added) .
We view this acquisition as a reinforcement of our investment
thesis that Broadcom's ability to strategically acquire and
integrate key technology is a significant competitive advantage .
We reiterate our STRONG BUY recommendation and remai n
comfortable with our 12-month price target of $295 .00 .
59 . On August 14, 2000, Broadcom filed with the SEC its Form 10-Q ,
signed by Ruehle, for the second quarter of 2000, ending June 30, 2000 . As with it s
July 31, 2000 announcement relating to Altima, Broadcom represented in its For m
10-Q that in addition to the purchase consideration, Broadcom would reserve up t o
35
1
2
3
4
5
6
7
8
9
10
11
12
13
14
15
16
17
18
19
20
21
22
23
24
25
26
27
28
approximately 2 .9 million shares of its Class A Common Stock for performance-
based warrants issued to customers .
60. For the same reasons set forth in ¶ 48 with respect to Broadcom 's July .
31, 2000, press release announcing the Altima acquisition, the second quarter 10- Q
was false and misleading.
61 . With respect to the Silicon Spice acquisition, the Company stated in it s
Form 10-Q :
In connection with the acquisition, the Company will issue in
aggregate approximately 5 .0 million shares of its Class A
common stock in exchange of all outstanding shares of Silico n
Spice preferred and common stock and upon exercise of
outstanding employee stock options, warrants and other rights o f
Silicon Spice .
62. For the same reasons set forth in ¶ 54 with respect to Broadcom 's August
7, 2000 press release announcing the Silicon Spice acquisition, the second quarte r
10-Q was false and misleading .
63 . On September 8, 2000, Broadcom issued a press release announcing it
had completed the acquisition of Altima. In the press release, Broadcom reported :
In connection with this acquisition , Broadcom issued an
aggregate of 1,661,784 shares of its Class A Common Stock in
36
1
2
3
4
5
6
7
8
9
10
11
12
13
14
15
16
17
18
19
20
21
22
23
24
25
26
27
28
exchange for all outstanding shares of Altima Preferred and
Common Stock and reserved 875,111 additional shares of Clas s
A Common Stock for issuance upon exercise of outstandin g
employee stock options of Altima .
In addition to the purchase consideration, Broadcom reserved
2,889,667 shares of its Class A Common Stock for futur e
issuance to customers upon the exercise of outstanding Altim a
performance-based warrants that become exercisable upon
satisfaction of certain customer purchase requirements .
The press release expressly designated Ruehle as the contact person for
related inquiries from the financial community .
64 . For the same reasons set forth in ¶ 48 with respect to Broadcom's Jul y
31, 2000, press release announcing the Altima acquisition, the September 8, 2000 ,
announcement was false and misleading .
65 . The September 8, 2000 announcement was incorporated in a Form 8- K
signed by Ruehle and filed by Broadcom with the SEC on September 22, 2000.
66 . On October 6, 2000, Broadcom issued a press release announcing it ha d
completed the acquisition of Silicon Spice . Broadcom yet again failed to disclos e
the number of customer warrants it had issued . The press release went on to state :
37
1
2
3
4
5
6
7
8
9
10
11
12
13
14
15
16
17
18
19
20
21
22
23
24
25
26
27
28
In connection with the acquisition, Broadcom issued a n
aggregate of 3,864, 161 shares of its Class A Common Stock i n
exchange for all outstanding shares of Silicon Spice Preferre d
and Common Stock and reserved 1,126,885 additional shares o f
Class A Common Stock for issuance upon exercise o f
outstanding employee stock options, warrants and other rights o f
Silicon Spice. The share issuances were exempt fro m
registration pursuant to section 3(a)(10) of the Securities Act o f
1933, as amended. Portions of the shares issued will be held i n
escrow pursuant to the terms of the acquisition agreement as
well as various employee share repurchase agreements .
The merger transaction will be accounted for under the purchase
method of accounting. Broadcom expects to record a one-tim e
charge for purchased in-process research and development
expenses related to the acquisition in its fourth fiscal quarter ,
ending December 31 (rather than in its third fiscal quarter as
previously advised) .
The press release expressly designated Ruehle as the contact person for
related inquiries from the financial community .
38
1
2
3
4
5
6
7
8
9
10
11
12
13
14
15
16
17
18
19
20
21
22
23
24
25
26
27
28
67 . For the same reasons set forth in ¶ 54 with respect to Broadcom's August
7, 2000, press release announcing the Silicon Spice acquisition, the October 6 ,
2000, announcement was false and misleading .
68 . The October 6, 2000 announcement was incorporated in a Form 8- K
signed by Ruehle and filed by Broadcom with the SEC on October 23, 2000 .
69. On October 17, 2000, Broadcom announced it had signed an agreemen t
to acquire Allayer . In its press release, Broadcom reported :
In connection with the acquisition, Broadcom will issue i n
aggregate about 1 .23 million shares of its Class A Common
Stock in exchange for all outstanding shares of Allayer's
Preferred and Common Stock and upon exercise of outstanding
employee stock options and other rights of Allayer
Communications . If certain performance goals are satisfied ,
Broadcom will issue up to an additional 300,000 shares of it s
Class A Common Stock to the stockholders and option holder s
of Allayer . The merger transaction is expected to close withi n
60 days and will be accounted for under the purchase method of
accounting. The boards of directors of both companies hav e
approved the merger . . . .
The press release expressly designated Ruehle as the contact person for
related inquiries from the financial community .
39
1
2
3
4
5
6
7
8
9
10
11
12
13
14
15
16
17
18
19
20
21
22
23
24
25
26
27
28
70. The October 17, 2000 announcement was false and misleading because i t
failed to disclose that, by giving Allayer customers millions of dollars in warrant s
for Broadcom stock as an inducement for an undisclosed amount of orders ,
Broadcom was heavily discounting its product to customers . More specifically,
Broadcom failed to disclose (1) its direct involvement in the warrant negotiation s
with Allayer's customers; (2) the amount of reduction in the revenue to Broadco m
which would occur as a result of the warrants issued to Allayer customers i f
accounted for properly ; and (3) the value of the warrants issued to customers . In
fact, Broadcom's announcement of the Allayer acquisition failed to make qLn y
reference to the 756,900 shares which had been reserved for issuance to customers .
Further, as described in greater detail in ¶ 171, Defendants used the Allayer
acquisition to put Broadcom warrants in the hands of at least one of Broadcom' s
own distributor in Asia for the purpose of inflating its revenues . Broadcom wa s
engaged in a scheme to use the acquisition of Allayer to manipulate the exchang e
of its equity for customer orders without ultimately accounting for the effect of the
issuance of the warrants on the Company's revenue in accordance with GAAP .
Broadcom's scheme misled the investing public as to Broadcom's true revenue s
and future revenue growth .
71 . The October 17, 2000 announcement was incorporated in a Form 8- K
signed by Ruehle and filed by Broadcom with the SEC on October 19, 2000 .
40
1
2
3
4
5
6
72. Broadcom's failure to fully disclose the nature of the warran t
transactions in connection with the Allayer acquisition was also evidenced in press
reports on the acquisition announcement . On October 18, 2000, The Wall Stree t
Journal reported on the Company 's announcement of the Allayer acquisition:
Under terms, Broadcom will exchange about 1 .23 million share s7
8
9
10
11
1 2
13
14
15
16
17
18
19
20
2 1
22
23
24
25
26
27
28
of its Class A common stock for all shares outstanding and stoc k
options of Allayer . Broadcom also said it will issue as many a s
300,000 additional shares if Allayer meets certain performanc e
criteria .
73 . On October 18, 2000, Broadcom reported record revenue and profit for
the third quarter of fiscal 2000 . The press release stated in part :
Broadcom Corporation (Nasdaq : BRCM) today reported record
revenue and profit for its third fiscal quarter, ended September
30, 2000 .
Revenue for the third quarter was a record $319 .2 million, an
increase of 128 .7% over the $139 .6 million reported in the third
quarter of 1999 and an increase of 30.2% over the $245 .2
million reported in the second quarter of 2000 . Pro forma net
income was a record $78 .7 million, or $ .30 per share (diluted) .
This compares with pro forma net income of $28 .7 million, or
$ .12 per share (diluted), for the same quarter in 1999 and with
pro forma net income of $61 .1 million, or $ .24 per shar e
(diluted), in the second quarter of 2000. Diluted earnings per
share for the quarter were based on 264 .8 million weighted
41
1
2
3
4
5
6
7
8
9
1 0
11
12
13
14
15
16
17
18
19
20
21
22
23
24
25
26
27
28
average shares outstanding, compared to 238 .3 million
weighted average shares outstanding in the third quarter of
1999 and to 253 .9 million weighted average shares outstanding
in the second quarter of 2000 .
Pro forma net income excludes the effects of acquisition-related
expenses and payroll taxes on certain stock option exercises .
Including these charges, net loss for the third quarter was $19.4
million, or $ .09 per share, compared with net income of $24 . 6
million, or $ . 10 per share (diluted), in the same quarter in 1999,
and with net income of $55 .9 million, or $.22 per share
(diluted), in the second quarter of 2000 .
During the third quarter, Broadcom announced three key
acquisitions Altima Communications, Inc ., Silicon Spice Inc .
and NewPort Communications, Inc . and closed a fourth
acquisition, Innovent Systems, Inc., first announced in June .
The Altima transaction also closed within the quarter . All four
acquisitions will be accounted for under the purchase method of
accounting.
"The 30 percent sequential revenue increase we experienced this
quarter was the result of continued strong momentum in the
broadband markets we serve" said Dr . Henry T. Nicholas III,
President and CEO of Broadcom Corporation . "We saw brisk
demand across our business lines from set-top boxes and cable
modems to enterprise networking equipment ."
The press release expressly designated Ruehle as the contact person
for related inquiries from the financial community.
74. The October 18, 2000 , announcement was false and misleading becaus e
it failed to disclose that, in fact, Broadcom's third quarter 2000 results were
42
1
2
3
4
5
6
7
8
9
10
11
12
13
14
15
1 6
17
18
19
20
21
22
23
24
25
26
27
28
manipulated and distorted by the Company's use of warrants issued by acquired
companies to secure purchase agreements from customers. From customers'
perspectives, these warrants, which allowed the customers to acquire Broadcom
stock for pennies on the dollar based on their purchases from Broadcom, were
considered discounts. Broadcom did not treat the warrants as discounts, however,
but considered them part of goodwill to be amortized over the period of the
acquisition. The announcement was incorporated in a Form 8-K signed by Ruehle
and filed with the SEC on October 19, 2000 .
75 . On October 18, 2000, subsequent to the release of its third quarter 200 0
results, Broadcom held a conference call for analysts, money and portfolio
managers, institutional investors and large Broadcom shareholders to discuss
Broadcom's third quarter 2000 results, its business and its prospects . During the
call and in follow-up conversations with analysts, Nicholas and Ruehle stated :
• Broadcom's stronger than expected third quarter 2000 revenue an d
earn ings were due to strong operating metrics across the board .
• 3Com had contributed almost 13% to Broadcom's revenue .
• Operating margins were higher than expected due to better contro l
of SG&A and R&D expenses .
• Broadcom was on track to report 2001 EPS of $1 .50+.
76. For the same reasons set forth in ¶ 74 above, the statements made durin g
the October 18, 2000, Broadcom conference call were false and misleading .
Further, Defendants knew, but did not disclose, that Broadcom's ability to meet its
expected revenue growth depended in large part upon its continued ability to : (a)
use acquisitions to manipulate the exchange of its equity for customer orders ; and
(b) treat the value of the warrants as goodwill rather than ultimately reducing its
revenues for the value of the warrants given to customers . Through this scheme,
Broadcom would be able to continue and maintain its trend of sequential an d
43
1
2
3
4
5
6
7
8
9
10
11
12
13
14
15
16
17
1 8
19
20
21
22
23
24
25
26
27
28
increasing revenue growth necessary to maintain the Company's artificially inflated
stock price .
77 . Analysts repeated these statements in reports issued shortly after the
conference call . A report dated October 19, 2000 by Chase Hambrecht & Quist Inc .
evidenced that revenue growth primarily determined Broadcom's value . The report
stated :
Estimates going up, again : We are increasing our Q4:00
estimates from $327M/0 .27 to $380M/0.31 (including dilutive
impact of some acquisitions) ; FY:00 goes from $1 .05B/0.90 to
$1 .14B/1 .00, and FY:01 goes from $1 .68B/$1 .30 to
$2.09B/$1 .54. We feel Broadcom's accelerating revenue
growth, war chest of new products, and string of recent
acquisitions will likely drive additional upside . We rate BRCM
shares BUY. (emphasis added) .
78 . Similarly, in an October 19, 2000 report commenting on
Broadcom's third quarter 2000 results, S .G. Cowen Securities Corporation
also raised its estimates significantly:
Revenue growth of 30% Q/Q was double the 15% we were
expecting . Management indicated they believe the Company
has the best long-term outlook ever .
We are raising our revenue estimate for 2000 from 1 .04B to
1 .23B. We are raising our 2000 EPS estimate from $0 .92 to
$1 .02.
44
1
2
3
4
5
6
7
8
9
10
11
12
13
14
15
16
17
18
19
20
21
22
23
24
25
26
27
28
In a stock market that accepts nothing out of quarterly earning s
reports other than undisturbed momentum and large estimat e
increases, BRCM's report should be among the well received .
(emphasis added) .
79 . On October 19, 2000, a W.R. Hambrecht & Co . analyst report entitle d
"BRCM : Firing On All Cylinders ; Raising Estimates Significantly," echoed the
other analysts' comments regarding the importance of Broadcom's revenue growt h
to the marketplace :
Revenue for the quarter was $319 million, representing
sequential growth of 30% and year-over-year growth o f
13 1 % . Revenue exceeded our estimate of $280 millio n
dollars by 14% .
We are raising revenue and EPS estimates for 2000 from
$1 .4 billion and $0 .92 respectively, to $1 .12 billion and
$1 .02 respectively. We are raising revenue and EPS
estimates for 2001 from $1 .6 billion and $1 .29 respectively ,
to $1 .82 billion and $1 .43, respectively .
We reiterate our Strong Buv recommendation . based on the
Company's excellent Q3 :00 results and our continued
enthusiasm for the Broadcom story . . . . We see larg e
45
1
2
3
4
5
6
7
8
9
10
11
12
13
14
15
16
17
18
19
20
21
22
23
24
25
26
27
28
growth potential for these converged markets and fo r
Broadcom as the predominant silicon solutions provider .
(emphasis added) .
80. On November 6, 2000, Broadcom issued a press release stating it ha d
signed an agreement to acquire SiByte, a leading developer of high performanc e
microprocessor solutions for broadband networking . In the press release ,
Broadcom stated :
In connection with the acquisition, Broadcom will issue in
aggregate up to 9.3 million shares of its Class A common stock
in exchange for all outstanding shares of SiByte's preferred an d
common stock and upon exercise of outstanding employee stock
options and other rights of SiByte . About 5 .6 million of the
Broadcom shares will be issuable at closing of the acquisition ;
approximately 3 .7 million additional shares will be reserved for
future issuance to the stockholders and option holders of SiByt e
upon satisfaction of certain performance goals . The merger
transaction is expected to close within 60 days and will be
accounted for under the purchase method of accounting . The
Boards of Directors of both companies have approved the
merger, which awaits approval by SiByte's shareholders and th e
satisfaction of regulatory requirements and other customary
46
1
2
3
4
5
6
7
8
9
10
11
12
1 3
14
15
16
17
18
19
20
21
22
23
24
25
26
27
28
closing conditions . Broadcom expects to record a one-time
charge for purchased in-process research and developmen t
expenses related to the acquisition in its fourth fiscal quarter ,
ending December 31 . In addition to the purchase consideration ,
Broadcom will reserve approximately 1 .8 million shares of its
Class A common stock for future issuance to customers upon
the exercise of outstanding performance-based warrants of
SiByte that become exercisable upon satisfaction of certai n
customer purchase requirements .
The press release expressly designated Ruehle as the contact person fo r
related inquiries from the financial community .
81 . The November 6, 2000, announcement was false and misleading becaus e
it failed to disclose that, by giving SiByte customers hundreds of millions of dollars
in warrants for Broadcom stock as an inducement for an undisclosed amount o f
orders, Broadcom was heavily discounting its products to customers . More
specifically, Broadcom failed to disclose (1) its direct involvement in the warrant
negotiations with SiByte's customers ; (2) the amount of reduction in the revenue t o
Broadcom which would occur as a result of the warrants issued to SiByte customer s
if accounted for properly ; and (3) the value of the warrants issued to customers . In
reality, Broadcom was engaged in a scheme to use the acquisition of SiByte to
manipulate the exchange of its equity for customer orders without ultimatel y
47
1
2
3
4
5
6
7
8
9
10
11
12
13
14
15
16
17
18
19
20
21
22
23
24
25
26
27
28
accounting for the effect of the issuance of the warrants on the Company's revenu e
in accordance with GAAP . Broadcom's scheme misled the investing public as t o
Broadcom's true revenues and future revenue growth .
82 . The November 6, 2000 announcement was incorporated in a Form 8- K
signed by Ruehle and filed by Broadcom with the SEC on November 7, 2000.
83 . Once again, press reports on the SiByte acquisition served as a means fo r
Broadcom to mislead the investing public as to the nature of the warrant
transactions by failing to provide any information regarding the value of warrant s
reserved, and the impact of those warrants on current and future revenue growth .
CNN Financial Network, in a November 6, 2000, article, stated :
Under the deal, Broadcom (BRCM :Research Estimates )
will issue up to 9 .3 million shares of its common stock in
exchange for privately held SiByte preferred and common
stock .
"The acquisition of SiByte complements our recent
acquisitions of Newport Communications and Silicon Spic e
and our pending acquisition of Allayer Communication s
and significantly expands Broadcom's product portfolio fo r
Internet infrastructure equipment," Broadcom president and
CEO Dr. Henry T . Nicholas III said.
48
1
2
3
4
5
6
7
8
9
10
11
12
13
14
15
16
17
18
19
20
21
22
23
24
25
26
27
28
The company said it would issue 5 .6 million shares when
the SiByte deal closes and another 3 .7 million shares if
certain performance goals are met .
84. A November 6, 2000, Reuters release reported similar information i n
describing the SiByte deal :
Broadcom said in a statement that it would issue up to 9 .3
million shares of its common stock for SiByte. At Friday' s
closing price of $222 - 3/8 for Broadcom stock, 9 .3 million
shares is worth about $2 .07 billion .
Broadcom said 5 .6 million shares will be issued at the
closing of the deal , expected in about 60 days. Another 3 . 7
million shares will be reserved for SiByte stockholders an d
option-holders when some performance goals are met .
85 . The Orange County Register, on November 7, 2000, discussed the
SiByte acquisition and its existing customer commitments, without any disclosur e
of customer discounts :
Aside from Nicholas' search for the gods, there were other
reasons for Broadcom to make SiByte the 16`h company o n
its list of acquisitions since it went public in 1998 .
49
1
2
3
4
5
6
7
8
9
10
11
12
13
14
15
16
17
18
19
20
21
22
23
24
25
26
27
28
SiByte which is privately held, already has orders for 1 .3
million of its planned networking chips -- before they've
even been manufactured . (emphasis added) .
86. The importance of Broadcom's revenue growth in relation to the*valu e
placed on the Company and its stock price by the market was apparent in a
November 7, 2000, article in The Los Angeles Times . The article reported on
investor tolerance for Broadcom's acquisition spree, including SiByte:
Meanwhile, the [SiByte] deal is expected to cause Broadcom' s
earning to drop by 3 cents a share for each of the next three to
four quarters, Nicholas said . The acquisition is not expected t o
add to Broadcom's profits until the beginning of 2002 . "That' s
almost 10% of their earnings, but their stock didn't go dow n
10%," said Rick Billy, a semi-conductor analyst at S .G. Cowen
Securities Corp .
"People will continue to give them the benefit of the doubt . The
market will tolerate anything, until Broadcom disappoints o r
throws off some clearly negative vibrations, which they're
clearly not doing," he said. (emphasis added) .
87 . As with the earlier acquisitions , unaware of the amount of reduction i n
the revenue to Broadcom which would occur as a result of the warrants issued to
50
1
2
3
4
5
6
7
8
9
10
11
12
13
14
15
16
17
18
19
20
21
22
23
24
25
26
27
28
SiByte if accounted for properly, analysts reacted positively to the SiByt e
acquisition. This was evidenced by a Morgan Stanley, Dean Witter analyst report :
We maintain our estimates and reiterate our Outperform
rating.
We think the SiByte acquisition is important, as it
solidifies the Company's commitment to providing an
open-architecture, system-level solution for the
communications IC market .
Based on the high level of customer interest and the expertis e
and experience of the team, we believe that SiByte's revenue s
have the potential to ramp quickly in 2002 . (emphasis added) .
88. In early November of 2000, concerns in the market surfaced regardin g
the prospects for sales of communications chips. These concerns caused Broadco m
stock to decline from the $220 range to below $170 .
89 . On November 9, 2000, Broadcom issued a press release stating it was
comfortable with analysts' estimates for the fourth quarter of fiscal 2000 . The press
release stated :
Broadcom Corporation today commented on investment
analysts' estimates for its fourth fiscal quarter, ending
December 31, 2000. Dr. Henry T. Nicholas III, President
and CEO of Broadcom, stated : "We are very comfortable
51
1
2
3
4
5
6
7
8
9
10
11
1 2
13
14
15
16
17
18
19
20
21
22
23
24
25
26
27
28
with analysts' estimates for the current quarter of a
sequential quarter-to-quarter percentage revenue growth
rate in the mid-teens (which would represent a revenue
increase of more than 125% over the fourth quarter of
1999) and of pro forma diluted earnings per share
consistent with the estimate of a majority of the analysts
of $ .31 . Our business in broadband communications and
enterprise networking chips continues to be strong, and
nothing has occurred to reduce our confidence since our
third quarter earnings conference call . "
Broadcom made the statement in light of the
extraordinary market reaction this week in the wake of
concerns expressed by some analysts regarding potential
reduced demand in the current quarter for certain
communications chips .
The press release expressly designated Reuhle as the contact person for related
inquiries from the financial community .
90. The November 9, 2000, Broadcom press release was false an d
misleading in that it did not disclose that Broadcom's current fourth quarte r
revenue, and much of its future revenue and earnings growth, was based o n
agreements to issue valuable warrants to the customers of acquired companies in
exchange for future orders .
52
1
2
3
4
5
6
7
8
9
10
11
12
13
14
15
16
17
18
19
20
21
22
23
24
25
26
27
28
91 . Broadcom repeated its misrepresentations regarding earnings estimate s
to the press and analysts . On November 10, 2000, The Los Angeles Times reported
on Broadcom's fourth quarter of 2000 earnings estimates :
"We are very comfortable with analyst's estimates for the
current quarter," Nicholas said in a news release . The
Company is expected to earn .31 ¢ a share, about double
earnings per share in the fourth quarter last year, according
to a First Call/Thomson survey of analysts .
Nicholas said the company's business "continues to b e
strong, and nothing has occurred to reduce our
confidence . "
92. On November 10, 2000, as broadcast over the news wires and television ,
Nicholas was inte rviewed by CNBC . Relevant po rtions of the transcript of the
interview follow:
MATHISEN: Cool . That sounds real neat . Let's drop that and
move on to the sort of broader business . How is
business? Are you seeing any signs of slowing ?
NICHOLAS : We are seeing no signs of slowing . Business i s
looking great . We are very comfortable with the
analysts' estimates for this quarter and we continu e
53
1
2
3
4
5
6
7
8
9
10
11
12
13
14
15
16
17
18
19
20
21
22
23
24
25
26
27
28
to execute our business plan. In fact, we just had
an earnings conference call and we just issued a
press release and nothing has happened betwee n
now and then to any way change our outlook .
93 . An analyst report by S .G. Cowen Securities Corporation, dated
November 13, 2000, indicated that analysts had met with Broadcom management t o
discuss recent concerns about slowing growth and end-customer inventories :
Management indicated (as they did in the press releas e
from 11/9) that they are comfortable with the estimates o f
$0.31 in Q4, but further clarified that this is after th e
approximate $0 .05 dilution from acquisitions that will clos e
in the quarter .
We have increased our expectations for sequential revenue
growth in Q4 from 15 .3% to 16 .6%. The acquisitions of
Newport, Silicon Spice, Allayer, and SiByte have adde d
substantial amounts to both operating expenses and shar e
count. These are permanent and recurring expenses which
are carried forward through all of 2001 . Management
maintained a favorable outlook and indicated that they
believe demand across all product lines remains robust .
54
1
2
3
4
5
6
7
8
9
10
11
12
13
14
15
16
17
18
19
20
21
22
23
24
25
26
27
28
94. Broadcom's statements to the press and analysts regarding its estimate s
for the fourth quarter of fiscal 2000 were false and misleading in that Broadco m
failed to disclose that its current fourth quarter revenue, and much of its future
revenue and earnings growth, was based on agreements to issue valuable warrants
to the customers of acquired companies in exchange for future orders .
95 . On November 14, 2000, the Company filed with the SEC its Form 10- Q
for the third quarter of 2000 ending September 30, 2000. Broadcom reported
substantially the same financial results as reported in its October 18, 2000 press
release. These financial results were false and misleading for the reasons discusse d
in ¶ 74 above .
96 . Ruehle signed the Form 10-Q, which stated that :
The condensed consolidated financial statements include d
herein are unaudited ; however, they contain all normal recurrin g
accruals and adjustments which, in the opinion of management ,
are necessary to present fairly the consolidated financial positio n
of Broadcom Corporation and its subsidiaries (collectively, the
"Company") at September 30, 2000 and the consolidated result s
of the Company's operations and cash flows for the three and
nine months ended September 30, 2000 and 1999 .
This statement was also false and misleading because Broadcom did not account for
the customer warrant transactions in accordance with GAAP. As detailed above in ¶
55
1
2
3
4
5
6
7
8
9
10
11
12
13
14
15
16
17
18
19
20
21
22
23
24
25
26
27
28
137(b), under GAAP , Broadcom was required to treat the warrants as unissued unti l
they (a) became exercisable upon the satisfaction by customers of their obligation s
under the purchase and development agreements, and (b) vested . The warrants
would subsequently be recorded as a reduction of Broadcom's revenues (based o n
the per share warrant fair values at the time of the respective business acquisitions) ,
as and to the extent they are earned and vest in future periods . Instead, the
Company included the value of the warrants as part of the purchase prices of the
companies it acquired . This resulted in the creation of additional goodwill, a
balance sheet asset, and one typically considered extraneous to operatin g
performance by investors and financial analysts . Broadcom amortized thi s
goodwill over a five-year period, regardless of the amount and timing of th e
associated revenues earned from exercise of the warrants by customers . As to the
purchase of Altima, Broadcom disclosed in this Form 10-Q that a component of it s
$1,219,874,000 purchase price consisted of approximately 2,889,667 shares fo r
performance-based warrants issued to customers . These warrants were valued at
$689 .4 million, based upon Broadcom's stock price on the day the acquisitio n
closed . Therefore , contrary to GAAP , the $689 .4 million value of thes e
performance-based warrants, which represented over half of the Altima purchas e
price, were recorded as goodwill and other intangibles on Broadcom's balanc e
sheet .
56
1
2
3
4
5
6
7
8
9
10
11
12
13
14
15
16
17
18
19
20
21
22
23
24
25
26
27
28
97. With respect to the Silicon Spice, Allayer and SiByte acquisitions, th e
Company stated in its Form 10-Q:
On October 6, 2000, the Company completed the acquisition of
Silicon Spice Inc . ("Silicon Spice"), a developer of
communications processors and other technology for high-
density voice, fax and data packet transmission over wide are a
networks. In connection with the acquisition, the Compan y
issued an aggregate of 3,864,161 shares of its Class A common
stock in exchange for all outstanding shares of Silicon Spice
preferred and common stock and reserved 1,126,885 additional
shares of Class A common stock for issuance upon exercise of
outstanding employee stock options, warrants and other rights of
Silicon Spice . . . .
In October 17, 2000 the Company announced that it had signe d
a definitive agreement to acquire Allayer Communications
("Allayer"), a developer of high-performance enterprise and
optical networking communications chips . In connection with
the acquisition, the Company will issue in aggregate abou t
1,230,000 shares of its Class A common stock in exchange fo r
all outstanding shares of Allayer's preferred and common stock
and upon exercise of outstanding employee stock options and
57
1
2
3
4
5
6
7
8
9
10
11
12
13
14
15
16
17
18
19
20
21
22
23
24
25
26
27
28
other rights of Allayer . . . . In addition to the purchas e
consideration , the Company will reserve an aggregate o f
approximately 790,000 shares of its Class A common stock for
future issuance to customers upon exercise of outstanding
performance-based warrants of Allayer that become exercisabl e
upon satisfaction of certain customer purchase requirements. . .
On November 6, 2000 the Company announced that it had
signed a definitive agreement to acquire SiByte, Inc . ("SiByte") ,
a developer of high-performance microprocessor solutions fo r
broadband networking . . . In addition to the purchas e
consideration, the Company will reserve approximatel y
1,800,000 million shares of its Class A common stock for futur e
issuance to customers based upon the exercise of outstanding
performance-based warrants of SiByte that become exercisabl e
upon satisfaction of certain customer purchase requirements .
98. Regarding the Silicon Spice acquisition, Broadcom failed to disclose th e
number of customer warrants it had issued for the third time . As to the Silicon
Spice , Allayer and SiByte acquisitions, Broadcom failed to disclose in this For m
10-Q: (1) its direct involvement in the warrant negotiations with the acquire d
companies' customers; (2) the amount of reduction in the revenue to Broadcom
which would occur as a result of the warrants issued to the customers if accounte d
58
1
2
3
4
5
6
7
8
9
10
11
12
13
14
15
16
17
18
19
20
21
22
23
24
25
26
27
28
for properly; and (3) the value of the warrants issued to the customers . Broadcom,
for the first time, did disclose, however, that some of its stock was going to Allayer
customers in exchange for purchase commitments . The acquisitions were part of a
scheme to manipulate the exchange of Broadcom's equity for customer orders
without ultimately accounting for the effect of the issuance of the warrants on the
Company's revenue in accordance with GAAP .
99. On November 28, 2000, Broadcom issued a press release stating that i t
had signed an agreement to acquire VisionTech, a leading supplier of digita l
video/audio compression and decompression chips . In its press release, Broadcom
stated in part :
In connection with the acquisition, Broadcom will issue in
aggregate about 7 .96 million shares of its Class A commo n
stock in exchange for substantially all of the assets o f
VisionTech and upon exercise of outstanding employee stock
options and other rights of VisionTech. The consideration
includes Broadcom Class A common stock reserved for futur e
issuance to customers upon the exercise of outstandin g
performance-based warrants of VisionTech that becom e
exercisable upon satisfaction of certain customer purchas e
requirements . The transaction is expected to close within 6 0
days and will be accounted for under the purchase method o f
59
1
2
3
4
5
6
7
8
9
10
11
12
13
14
15
16
17
18
19
20
21
22
23
24
25
26
27
28
accounting. The Boards of Directors of both companies hav e
approved the transaction, . . . .
The press release expressly designated Ruehle as the contact person for
related inquiries from the financial community.
100. The November 28, 2000 , announcement was false and misleading
because it failed to disclose that, by giving VisionTech customers hundreds o f
millions of dollars in warrants for Broadcom stock as an inducement for an
undisclosed amount of orders, Broadcom was heavily discounting its products t o
VisionTech customers . More specifically , Broadcom failed to disclose : ( 1) its
direct involvement in the warrant negotiations with VisionTech customers ; (2) the
amount of reduction in the revenue to Broadcom which would occur as a result of
the warrants issued to VisionTech customers if accounted for properly ; and (3) the
value of the warrants issued to VisionTech customers . In fact, Broadcom's
announcement of the VisionTech acquisition failed to even mention that
approximately 5 million, or 63% of the 7 .96 million shares of Broadcom stock a t
issue, were reserved for warrants given to VisionTech customers as an inducement
for an undisclosed amount of orders . Further, Broadcom failed to disclose tha t
some of the warrants for Broadcom stock given to at least one VisionTech custome r
were in return for orders of Broadcom products, not products of VisionTech. In
reality, Broadcom was engaged in a scheme to use the acquisition of VisionTech to
manipulate the exchange of its equity for customer orders without ultimatel y
60
1
2
3
4
5
6
7
8
9
10
1 1
12
13
14
15
1 6
1 7
18
19
20
2 1
22
23
24
25
26
27
28
accounting for the effect of the issuance of the warrants on the Company's revenu e
in accordance with GAAP . Broadcom ' s scheme misled the investing public as t o
Broadcom's true revenues and future revenue growth .
101 . The November 28, 2000 announcement was incorporated in a Form 8- K
signed by Ruehle and filed by Broadcom with the SEC that same day .
102. Following the news of the VisionTech acquisition, Banc of Americ a
Sec reiterated Broadcom as a "Strong Buy. "
103 . As with its previous acquisitions, Broadcom used both the press an d
analysts to mislead the investing public as to the real value of the VisionTec h
acquisition by emphasizing customer commitments, but failing to disclose the tru e
impact of the customer discounts on Broadcom's earnings . For instance, a
November 28, 2000, article published by CNN Financial Network commented
favorably on the VisionTech acquisition and noted that VisionTech 's clientele
included Motorola Broadband Communications, Scientific -Atlanta, Microsoft Web
TV and Replay TV. The article stated :
Quoting a recent industry study, Broadcom noted that PVR-
enabled set-top box shipments are expected to grow by 275
percent each year for the next three years . "PVR is one of the
most compelling consumer applications which will radically
change the way people watch TV ," said Henry Nicholas ,
Broadcom's President and Chief Executive in a prepare d
61
1
2
3
4
5
6
7
8
9
10
11
12
13
14
15
16
17
18
19
20
21
22
23
24
25
26
27
28
statement. "VisionTech's capability to compress live video and
real time will be used across all of Broadcom's product lines for
applications ranging from distributed video over home
networking to IP video streaming over the Internet ."
104. On November 28, 2000, CNETNews.com also published a favorable
article on the VisionTech acquisition . The article quoted Nicholas : "Despite all the
market turbulence, our ability to go off and complete a strategic acquisition . . . i t
really demonstrates the strength of our companies ." In a separate article on the
same date, CNETNews . com interviewed Nicholas regarding the recent slide in
Broadcom's stock price :
However, Nicholas said the company's outlook hasn't changed .
"We have confidence in the analyst's numbers," he said .
Nicholas added that a slow down in equipment orders fro m
AT&T's cable arm is having a bigger effect on the companie s
that make the cable infrastructure than it is having on those that
make set-top boxes or components for set-top boxes . "We
haven't seen any effect on box orders", Nicholas said . "Our
visibility is unchanged ."
105 . On November 29, 2000, W .R. Hambrecht & Co . issued a report o n
Broadcom's VisionTech acquisition. The report viewed the acquisition positivel y
in terms of its strategic fit with Broadcom's technology portfolio, based in part o n
62
1
2
3
4
5
6
7
8
9
10
11
12
13
14
15
16
17
18
19
20
21
22
23
24
25
26
27
28
design wins VisionTech had achieved with many set top box and personal vide o
recorder manufacturers, including Motorola Broadband Communications Secto r
(formerly General Instrument), Scientific-Atlanta, Pace, Microsoft, Web TV, and
Replay.
106. On November 30, 2000, The Los Angeles Times published an article on
the VisionTech acquisition . The article quoted from an analyst report by Mark
Edelstone of Morgan Stanley, Dean Witter :
Broadcom's announcement Tuesday that it will acquir e
VisionTech Ltd., an Israeli manufacturer of chips for digital
video recording, is more good news, Edelstone said, calling th e
acquisition "highly strategic" and "complementary ."
"VisionTech products have the potential to ramp quickly i n
2001 and generate revenue that comfortably exceeds $10 million
dollars per quarter by the end of the year," he wrote .
107. On December 13, 2000, Broadcom announced it had completed the
acquisition of Allayer. Unlike its earlier press release announcing the acquisition,
Broadcom acknowledged that some of the Broadcom stock used to purchas e
Allayer was going to Allayer customers . The press release stated in part :
The merger transaction will be accounted for under the purchase
method of accounting. Broadcom will record a one-time charg e
for purchased in-process research and development expense s
63
1
2
3
4
5
6
7
8
9
10
11
12
13
14
15
16
17
18
19
20
21
22
23
24
25
26
27
28
related to the acquisition in its fourth fiscal quarter, endin g
December 31 .
In addition to the purchase consideration, Broadcom reserved
756,900 shares of its Class A common stock for future issuance
to customers upon the exercise of outstanding
performance-based warrants of Allayer that become exercisabl e
upon satisfaction of certain customer purchase requirements .
The press release expressly designated Ruehle as the contact person for
related inquiries from the financial community .
108 . For the same reasons set forth in ¶ 70 above with respect to Broadcom' s
October 17, 2000 , press release announcing the Allayer acquisition (except the
failure to disclose the number of warrants reserved for customers), Broadcom' s
December 13, 2000, announcement was false and misleading .
109. The December 13, 2000 announcement was incorporated in a Form 8- K
signed by Ruehle and filed by Broadcom with the SEC on December 15, 2000 .
110. On December 18, 2000, Broadcom issued a press release announcin g
that it had completed the acquisition of SiByte. In its press release, Broadco m
stated :
In connection with the acquisition, Broadcom issued or reserved
for future issuance an aggregate of 7,469,496 shares of its Class
A common stock in exchange for all outstanding shares o f
64
1
2
3
4
5
6
7
8
9
10
11
12
13
14
15
16
17
18
1 9
20
21
22
23
24
25
26
27
28
SiByte's preferred and common stock and upon exercise of
outstanding employee stock options and other rights of SiByte .
The consideration includes Broadcom Class A common stock
reserved for future issuance to customers upon the exercise of
outstanding performance-based warrants of SiByte that become
exercisable upon satisfaction of certain customer purchase
requirements . If certain internal performance goals are satisfied,
the stockholders and option holders of SiByte will receive up to
3,751,878 additional shares of Broadcom Class A common
stock. The share issuances were exempt from registration
pursuant to section 3(a)(10) of the Securities Act of 1933, as
amended. Portions of the shares issued will be held in escrow
pursuant to the terms of the acquisition agreement as well as
various employee share repurchase agreements .
The merger transaction will be accounted for under the purchase
method of accounting. Broadcom will record a one-time charge
for purchased in-process research and development expenses
related to the acquisition in its fourth fiscal quarter, ending
December 31 .
The press release expressly designated Ruehle as the contact person fo r
related inquiries from the financial community .
111 . For the same reasons set forth in ¶ 81 above with respect to Broadcom' s
November 6, 2000, press release announcing the SiByte acquisition, Broadcom's
December 18, 2000, announcement was false and misleading . In fact, unlike its
earlier announcement, the December 18, 2000, press release failed to even disclose
the specific number of warrants reserved for customers .
112. The December 18, 2000 announcement was incorporated in a Form 8- K
signed by Ruehle and filed by Broadcom with the SEC on December 29, 2000 .
65
1
2
3
4
5
6
7
8
9
10
11
12
13
14
15
16
17
18
113 . Analysts again commented favorably on the completion of the SiByte
acquisition. A report by Robertson Stevens stated :
We believe SiByte was a good choice given the reported
purchase orders from top-tier system OEMs for 1 .3 million
units .
Second, on top of having significant purchase orders, we
believe that SiByte enables Broadcom to capitalize on the
growing industry trend toward the MIPS architecture .
114. On January 1, 2001, The Orange County Register reported on
Broadcom's year-end 2000 estimated results :
"You have to be in the right market," said Broadcom Vice-
President and CFO Bill Ruehle . "Refrigerators aren't an
exciting market . We are in a market that is growing."
(emphasis added) .
"Each market we're in has substantial growth rates," he said .
"We're targeting more silicon real estate - more layers. And
we're making inroads within each specific layer." (emphasis19
20
21
22
23
24
25
26
27
28
added) .
115 . Ruehle's statements were false and misleading in that he failed t o
disclose that, by giving customers hundreds of millions of dollars in warrants fo r
Broadcom stock as an inducement for an undisclosed amount of orders, Broadcom
was heavily discounting its products to customers . Ruehle also failed to disclos e
that Broadcom was using its acquisition strategy to manipulate the exchange of it s
66
1
2
3
4
5
6
7
8
9
10
11
12
13
14
15
16
17
18
19
20
21
22
23
24
25
26
27
28
equity for customer orders without ultimately accounting for the effect of th e
issuance of the warrants on the Company ' s revenue in accordance with GAAP .
116. On January 5, 2001, the Company issued a press release announcing it
had completed the acquisition of VisionTech . Broadcom again failed to disclose
that the majority of the shares it issued for the acquisition were, in reality, going to
VisionTech customers . In the press release, Broadcom stated in pertinent part :
In connection with the acquisition, Broadcom issued or reserved
for future issuance an aggregate of 7,964,272 shares of its Clas s
A common stock in exchange for substantially all of the assets
of VisionTech and upon exercise of outstanding employee stock
options, warrants and other rights of VisionTech . The
consideration includes Broadcom Class A common stock
reserved for future issuance to customers upon the exercise of
outstanding performance-based warrants of VisionTech that
become exercisable upon satisfaction of certain custome r
purchase requirements .
The press release expressly designated Ruehle as the contact person for
related inquiries from the financial community .
117. For the same reasons set forth in ¶ 100 above with respect to
Broadcom's November 28, 2000, press release announcing the VisionTech
acquisition, the January 5, 2001 announcement was false and misleading .
67
1
2
3
4
5
6
7
8
9
10
11
12
13
14
15
16
17
18
19
20
21
22
23
24
25
26
27
28
118. The January 5, 2001 announcement was incorporated in a Form 8- K
signed by Ruehle and filed by Broadcom with the SEC on January 18, 2001 .
119. On January 23, 2001 , Broadcom reported record revenue and profit for
both the fourth quarter of fiscal 2000 and full year 2000 . The press release issue d
in connection with the report stated :
Revenue for the fourth quarter was a record $376 .1 million, an
increase of 132% over the $162.0 million reported in the fourth
quarter of 1999 and an increase of 18% over the $319 .2 million
reported in the third quarter of 2000 . Pro forma, net income wa s
a record $86 .7 million, or $ .32 per share (diluted) . This
compares with pro forma net income of $32 .0 million, or $ .1 3
per share (diluted), for the same quarter in 1999, and pro form a
net income of $78 .7 million, or $ .30 per share (diluted), in th e
third quarter of 2000 . Diluted earnings per share for the quarter
were based on 274 .1 million weighted average share s
outstanding, compared to 245 .2 million weighted average shares
outstanding in the fourth quarter of 1999 and to 264 . 8 million
weighted average shares outstanding in the third quarter o f
2000.
For the full year 2000, revenue was a record $1 ..1 billion, an
increase of 117% over the $521 .2 million reported for 1999 . Pro
68
1
2
3
4
5
6
7
8
9
10
11
1 2
13
14
15
16
17
18
19
20
21
22
23
24
25
26
27
28
forma net income for 2000 was a record $217 .4 million, an
increase of 172% over the $99 .8 million for 1999 . . . . During the
fourth quarter, Broadcom announced four significan t
acquisitions - Elementl4, Inc ., Allayer Communications ,
VisionTech, Ltd . and SiByte, Inc. All four transactions have
been completed . Additionally, two other key acquisition s
announced during the third quarter - NewPort Communications ,
Inc. and Silicon Spice Inc . - closed in the fourth quarter . All of
these acquisitions were accounted for under the purchase
method of accounting. . . .
"Our fourth quarter and full year financial results demonstrated
the strength of our traditional product lines as well as the soli d
growth we are experiencing in new and emerging markets, many
of which we are responsible for creating," said Dr . Henry T.
Nicholas III, Broadcom's President and CEO . "During the year,
Broadcom reached the $1 billion revenue level, a significant
milestone that made us the fastest growing U .S. semiconductor
company to date, a testament to both the company's ability to
execute well in multiple broadband markets and the tremendous
growth of those markets ."
As more particularly set forth below in ¶ 129, these statements and the
accompanying financial statements were false and misleading .
120 . On January 23, 2001, subsequent to the release of its fourth quarter
2000 results, Broadcom held a conference call for analysts, money and portfoli o
69
1
2
3
4
5
6
7
8
9
1 0
11
12
13
14
15
16
17
18
19
20
21
22
23
24
25
26
27
28
managers, institutional investors and large Broadcom shareholders to discuss
Broadcom's fourth quarter 2000 results, its business and its prospects . During the
call and in follow-up conversations with analysts, Nicholas and Ruehle stated :
• Broadcom's fourth quarter 2000 results were extremely strong du e
to the strength of the Company's traditional product lines, as well a s
growth from emerging markets .
• Broadcom was benefiting from an industry trend toward increase d
integration of technologies and the combination of voice, video an d
data onto single networks .
• 3Com had represented 22% of Broadcom's revenues in the fourth
quarter 2000 due to the introduction of new products in a variety o f
product segments .
• Broadcom was on track to report EPS of $ .34 and $1 .60 in the firs t
quarter 2000 and 2001 and full year 2001, respectively .
As more particularly set forth below in ¶ 129, these statements were false and
misleading .
121 . Analysts repeated these statements in reports issued within 48 hours of
the conference call . A Morgan Stanley, Dean Witter report noted :
During the quarter, Broadcom and 3Com (22% of Broadcom's
revenues) announced the formation of a strategic alliance for 10
Gigabit Ethernet Network Interface Cards (NICs) . Under the
agreement, Broadcom and 3Com will jointly develop silicon fo r
Gigabit Ethernet NICs . Gigabit NICs represented about 6% of total
NIC sales for 3Com in Q3 2000, but grew 50% sequentially . 3Com
already has a 35% share of this nascent market through its acquisition
of Alteon's Gigabit NIC business . We believe that 3Com and
Broadcom plan to deliver Gigabit Ethernet solutions at only a slight
premium over the cost of fast Ethernet solutions, which could
70
1
2
3
4
5
6
7
8
9
10
11
12
13
14
15
16
1 7
18
19
20
2 1
22
23
24
25
26
27
28
dramatically accelerate the adoption of Gigabit Ethernet and become a
major catalyst for revenue growth.
122 . Following Broadcom's January 23, 2001 earnings announcement, an d
again reiterating the conclusion that the market valued Broadcom's stock almost
exclusively on the purported increase in revenue, W .R. Hambrecht & Co . issued a
report noting that Broadcom's fourth quarter revenue of $376 .1 million represente d
sequential growth of 18 percent, surpassing its estimate of $366 million dollars .
W.R. Hambrecht & Co . maintained its Buy recommendation .
123 . In reporting on Broadcom's fourth-quarter earnings, a January 23 ,
2001, CNET News . com article quoted Nicholas :
"We beat the numbers again ," Henry Nicholas ,
Broadcom 's CEO said in an interview. "Everyone's
blowing up. We aren't ." (emphasis added) .
As more particularly set forth below in ¶ 129, these statements were false and
misleading .
124 . Commenting on Broadcom's anticipation of continued strong results an d
I its expectations that the Company would meet analysts' expectations for futur e
quarters, the CNETNews. com article further stated :
Even though some of its customers are experiencing slower
growth, Nicholas said in an interview, Broadcom has kept
growing by entering new markets and increasing its silicon
content in the products it already provides chips for .
Nicholas added that Broadcom is well positioned to ride out
the downturn in the overall economy. "No one is
impervious to a slowdown, but I would say we have a s
71
1
2
3
4
5
6
7
8
9
10
11
12
13
14
1 5
16
17
18
19
20
21
22
23
24
25
26
27
28
good or better immunity to any slow down as any chip
company out there . "
125 . On January 23, 2001, TheStreet.com also reported the Company's
fourth quarter results as well as expected results for the first quarter 2001 :
Communications chip maker Broadcom . . . said Tuesday
that fourth quarter earnings rose .320 a share, beating Wall
Street's expectation as revenue hit a higher-than-foreseen
level .
On the Company's conference call, Broadcom Chief
Financial Officer Bill Ruehle said that including revenue
from recent acquisition ServerWorks, Broadcom's first
quarter revenue should increase 22% to 23% from the
fourth quarter, which would put it at roughly $459 million
dollars. Earnings should come in at .33¢ a share, he said .
126. Similarly, on January 24, 2001, The Orange County Register reported
on Broadcom's strong fourth-quarter results :
"We had solid results across the board," said Chief
Executive Henry T . Nicholas III .
Broadcom predicted more to come . The company said it
would achieve 100% growth in revenues for 2001, wit h
earnings about $1 .50 to $1 .60 per share for the year, no t
counting charges .
72
1
2
3
4
5
6
7
8
9
10
11
12
13
14
15
16
17
1 8
19
20
21
22
23
24
25
26
27
28
127 . Noting Ruehle's statements relative to the Company's continued
revenue growth, a January 24, 2001 article in The Los Angeles Times reported on
fourth quarter results :
At Broadcom, Chief Financial Officer Bill Ruehle said th e
Company expects to continue its sales growth, increasing 22%
to 23% this quarter over the previous quarter . Broadcom
expects to post earnings of about 33 cents per share this quarter,
not including acquisitions and other costs, Ruehle said .
128 . A January 24, 2001, Merrill Lynch analyst report also toute d
Broadcom's success vis-a-vis its competitors :
Broadcom reported YOY revenue growth of 134% to $376
million, $10 million above our estimate . Operating EPS of
$0.32 beat our $0 .30 estimate.
Broadcom reported 18% sequential revenue growth -
interestingly, management indicated that it saw strength
across all its product lines . We think the company deserves
a lot of credit for beating our top line estimate while
numerous other semiconductor companies have reported
disappointments . We attribute it to Broadcom's tight
channel management processes and strong product line .
129 . Each of Defendants' statements in IN 119-128 regarding Broadcom' s
reported fourth quarter and year-end 2000 revenue and future revenue growth were
false and misleading because, unbeknownst to the market, the results wer e
manipulated and distorted by the Company's use of warrants issued by acquired
companies to secure purchase agreements from customers. From customers'
perspectives, these warrants, which allowed the customers to acquire Broadcom
stock for pennies on the dollar based on purchases from Broadcom, were treated as
73
1
2
3
4
5
6
7
8
9
10
11
12
13
1 4
15
16
17
18
1 9
20
21
22
23
24
25
26
27
28
discounts . Broadcom did not treat the warrants as discounts, however, but
considered them part of goodwill to be amortized over the period of the acquisition .
As such, Broadcom's net sales and net income (excluding non-recurring charges)
were overstated. Specifically, Broadcom's failure to record as a reduction in
revenue the value of warrants earned during the fourth quarter overstated Company
revenues by 10%, or $38 .6 million. Broadcom's true revenue for that quarter
($340.2 million) and sequential quarterly revenue growth (6 .5%) were below
market expectations . Broadcom knew that its ability to meet its expected revenue
growth depended, in large part, upon its continued ability to use acquisitions to
manipulate the exchange of its equity for customer orders and to treat the value of
the warrants as goodwill, rather than matching the value of the warrants given to
customers as an expense against its revenues . Through this scheme, Broadcom
would be able to continue and maintain its trend of sequential and increasing
revenue growth necessary to maintain the Company's artificially inflated stock
price. Thus, Broadcom did not disclose that much of its future revenue and
earnings growth was based upon agreements to issue valuable warrants to
customers of the acquired companies in exchange for future orders .
130. On February 7, 2001, in a conference call published on Broadcom' s
website, Nicholas indicated that the Company might not meet its guidance for firs t
quarter 2001 revenue growth of 23% - a forecast made just two weeks earlier .
131 . In a February 7, 2001 article, The Industry Standard reported on the
narrowed revenue forecast :
When Broadcom reported fourth quarter results on January
23, it forecast that first quarter sales would raise 22% to 23%
over the 376 .1 million dollars it posted in the fourth quarter .
[Nicholas] now says the figure will be lower, but didn't give
specifics . Broadcom CFO Bill Ruehle added that some o f
74
1
2
3
4
5
6
7
8
9
10
11
12
13
14
15
16
17
1 8
19
20
21
22
23
24
25
26
27
28
the company's customers in the cable-modem business didn't
really need all the chips they had been buying .
132 . In a February 7, 2001 article on CNET News . com, Nicholas addressed
the revised revenue forecast in the context of Broadcom's relationship with one o f
its major customers, 3Com :
Nicholas said the decline in revenue is not a result of the
breakdown in the Company's tight relationship with 3Com .
Rumors have swirled recently that 3Com was going to start
using chips from other manufacturers for its network cards .
"Our business with 3Com is as strong as it has ever been, "
Nicholas maintained . (emphasis added) .
133 . Contrary to Nicholas' statements , just three weeks later (and the day
following disclosure of the revenue growth scheme), according to Broadcom,
3Com terminated its purchase and warrant agreement with Broadcom to purchase
certain components through December 2002 . According to 3Com's Form 10-Q for
the quarter ended March 2, 2001, 3Com terminated the agreement "[a]s certain
terms of the purchase agreement were not met . . ." And, contrary to Broadcom's
repeated assertions that the warrant/purchase agreements contained significant
disincentives for nonperformance, 3Com's 10-Q states that the agreement was
terminated by 3Com "without penalty ." Finally, as set forth in ¶ 150 herein,
Broadcom's representations that it decided to review (and seek input from the SEC)
and subsequently correct its accounting for the warrants only after the February 28,
2001 cancellation of the 3Com contract is contrary to statements in a March 7, 2001
report in The Los Angeles Times indicating that Broadcom's accounting methods
had been subject to scrutiny since early February, 2001 and suggesting that the SEC
was already examining the accounting methods used for the acquisitions .
134. Commenting on the revised revenue announcement, W.R. Hambrecht
& Co. noted in a February 7, 2001 report :
75
1
2
3
4
5
6
7
8
9
10
1 1
12
13
14
15
16
17
18
1 9
20
21
22
23
24
25
26
27
28
We are maintaining our Buy recommendation for the shares
of Broadcom, as our long term enthusiasm for the
Broadcom story remains unchanged, and we believe the
Company is well positioned to resume accelerated growth
once the inventory correction is completed .
135 . The revised revenue forecast caused Broadcom stock to begin t o
decline, but did not inform the market that significant portions of the Company's
fourth quarter 2000 revenues and earnings could be attributed to Broadcom's
purchase of revenues through the use of warrants issued to customers in exchange
for orders.
136. On February 26, 2001, Broadcom stock closed at $63 per share .
137. All of the above statements from Defendants regarding Broadcom' s
acquisitions, financial results and present and future growth rates were materiall y
false and misleading for at least the following reasons :
(a) When announcing the acquisitions, Defendants neither disclosed thei r
role in arranging the warrant transactions prior to the acquisitions nor the amount o f
reduction in the revenue to Broadcom which would occur as a result of the warrant s
issued to customers of the acquired companies if accounted for properly .
Broadcom also did not disclose the value of the warrants issued to customers durin g
the third and fourth quarter, when the Company reported revenue growth of 129%
and 132% for the third and fourth quarter of fiscal 2000, respectively, over the prio r
year, as well as sequential quarterly revenue growth of 30% and 18% . Investors
had no way, and still have no way, to determine the true net revenue amounts fro m
these warrant arrangements, the real product discount rates that the Company has
76
1
2
3
4
5
6
7
8
9
10
11
12
13
14
15
16
1 7
18
19
20
2 1
22
23
24
25
26
27
28
been giving these customers by virtue of the warrants, and the Company's futur e
revenue growth .
(b) As described above, Broadcom failed to account for the value of th e
customer warrants in accordance with GAAP for the five acquisitions at issue .
Further, Broadcom falsely represented that its financial statements were prepared in
accordance with GAAP. GAAP required the Company to record the value of the
warrants as a reduction of revenue as and to the extent any warrants were earne d
and vested in future periods . Broadcom did not record the value of the warrants as
a revenue reduction in the third quarter of 2000 . Instead, Broadcom improperly
treated the value of the warrants as goodwill from the acquisitions - an asset - not a
liability, on its balance sheet . As a result, Broadcom's September 30, 2000 ,
financial statements did not reflect its true financial condition, and the Company' s
stated revenue growth rates between quarters and compared to the prior year were
substantially overstated. Further, Broadcom's December 31, 2000 and year-en d
2000 financial statements, as reported and released by the Company on January 23 ,
2001, were also false and misleading and failed to reflect Broadcom's true financia l
condition. Specifically, Broadcom failed to record as a reduction in revenue th e
value of warrants which became exercisable and vested during the fourth quarter .
Consequently, Broadcom overstated revenue for the quarter and year-end by 10%
and 3 .4%, respectively. Indeed, one analyst has estimated that these imprope r
accounting practices inflated the Company's sales-growth by as much as 50% .
77
1
2
3
4
5
6
7
8
9
10
11
12
13
14
15
16
17
1 8
19
20
21
22
23
24
25
26
27
28
Since Broadcom's price was largely determined by existing and anticipate d
revenues, rather than earnings, these misstatements and omissions were material .
(c) By giving hundreds of millions of dollars worth of warrants t o
customers as an inducement for their orders, Broadcom was heavily discounting its
product sales . Customers like 3Com - which contributed 13% and 22% of the
Company's revenues for the third and fourth quarter, respectively - received
discounts as high as 68% on $360 million of product orders, factoring in the value
of warrants that it received in return. The Company did not disclose the effect of
these deep discounts on its revenue growth to customers or their effect on fourth
quarter 2000 revenue and revenue growth rates .
(d) Broadcom's accounting treatment was contrary to SEC rules, whic h
require companies to deduct from gross revenues the value of warrants given to
customers as an inducement for their orders as and to the extent any warrants are
earned and vest in future periods . The SEC's position on customer warrants is, and
was, widely known at all material times alleged herein . On September 26, 2000,
for example, The Wall Street Journal reported that the SEC had required another
company, CoSine Communications, Inc . ("CoSine") to amend its registration
statement to include a charge against revenues reflecting the value of warrants the
company had given customers in return for their product orders . After adjusting for
the value of the warrants, CoSine's revenues were one-third less than previously
reported. To comply with SEC rules and report accurate financial statements,
Cosine's financial statements now report two measures of revenue, including one
that excludes "noncash charges related to equity ." Defendants knew or recklessly
disregarded the SEC's requirements regarding accounting for these types of
customer equity transactions . Furthermore, on October 13, 2000, the SEC's Office
of the Chief Accountant, in its 2000 Audit Risk Alert to the American Institute of
Certified Public Accountants, reiterated its position that the value of equit y
78
1
2
3
4
5
6
7
8
9
10
11
1 2
13
14
15
16
1 7
1 8
1 9
20
21
22
23
24
25
26
27
28
instruments granted to customers in exchange for purchase orders must be classifie d
in the income statement by the grantor as a reduction in revenue .
THE TRUTH EMERGES
138 . On February 27, 2001, The Wall Street Journal published an article
questioning Broadcom's accounting treatment for its revenue and warrant
arrangements . In the wake of the adverse material facts disclosed in that article, th e
Company's stock price fell nearly 15%, from $63 per share the day before to
$53 .62 per share that day, on unusually heavy volume . The stock subsequently fell
as low as $41 per share on March 1, 2001 .
139. The Wall Street Journal reported :
Broadcom Corp . has been gobbling up small start-up companies for
the past two years to help fuel its sizzling growth . But the way the
maker of communications chips is accounting for some aspects of
certain transactions is raising concern among some analysts, investors
and accountants .
The questions surround Broadcom's accounting for warrants - or rights
to buy stock - issued to customers of companies that it acquires as an
incentive to buy products .
The transactions are complex . But the thrust of the criticism is tha t
Broadcom effectively is providing a discount to these customers that
isn't clearly reflected in its financial statements . The discounts are the
latest signal of the hyper competitiveness of the technology sector,
especially commodity areas like chips .
Among critics' questions : How sustainable is Broadcom's sales growth
without these discounts?
79
1
2
3
4
5
6
7
8
9
10
1 1
12
13
14
15
16
17
18
19
20
21
22
23
24
25
26
27
28
"There's reason to question the legitimacy of that revenue and net
income," says Howard Schilit, a former accounting professor and the
president of the Center for Financial Research and Analysis in
Rockville, Md ., speaking generally about warrants being used but not
reflected as an expense associated with sales . "In all cases the
warrants should be discounted from revenue . "
But Broadcom's chief financial officer, Bill Ruehle, responds : "I don't
think there is anything to be concerned about ." He adds that the
company worked extensively with its accountants on how to treat the
contracts and the acquisitions . The company sometimes encourages
the use of warrant-related sales agreements at target companies, an d
Mr. Ruehle says it makes sense for Broadcom to get thes e
commitments so that it can be sure the acquired company can meet it s
financial goals . "Last time I checked, aggressive marketing practice s
are okay."
Broadcom says deals that included warrant arrangements in the past
year include the acquisitions of VisionTech Ltd . and Altima
Communications Inc. Customers who have signed such warrant
agreements include networking-equipment maker 3Com Corp . and set
top box maker Pace Micro Technology PLC .
Shares of Broadcom have fallen about 25% since the beginning of th e
year, compared with a 7% decline for the Nasdaq Composite Index .
Shares of chip makers have been pummeled as a slowdown in deman d
80
1
2
3
4
5
6
7
8
9
10
11
12
13
14
15
1 6
17
18
19
20
21
22
23
24
25
26
27
28
crimped sales. As of 4 p.m. in Nasdaq Stock Market trading,
Broadcom shares were off $6 .44 to $63 .
Some analysts say the existence of the warrants could
potentially add hundreds of millions in sales for
Broadcom; Broadcom's revenue last year was $1 .1 billion .
Broadcom says it doesn't think the contracts, or the way it
treats them, inflate its revenue or its gross profit margin,
calling revenue related to such agreements "insignificant . "
But analyst Asok Kumar of US Bancorp Piper Jaffray
estimates it is inflating the sales-growth rate at the chip
maker by as much as 50% . "Are they buying revenue?
That is the question "adds portfolio manager John Spytek
of BancOne Investment Advisors, which owns Broadcom
shares. "If [revenue related to the warrants] is a
significant portion of sales, I'd hope they'd disclose it ."
Broadcom says the amount is too small to disclose .
Jim Kroeker, a staff member at the Financial Accounting
Standards Board, a rule-making body for the accounting
industry, says that, in general, not deducting from revenue
the cost or value of warrants as they vest would be
"troubling . "
When Broadcom bought Altima in September, it paid
more than $500 million in stock for the closely held
maker of chips used in networking gear . In a footnote to
its l OQ filing, Broadcom noted that it also set aside 2 .8 9
81
1
2
3
4
5
6
7
8
9
10
11
1 2
13
14
15
16
17
18
19
20
21
22
23
24
25
26
27
28
million shares - worth more than $689 million at the tim e
the transaction closed - for warrants on Altima shares that
had been issued to customers who agreed to buy a certain
amount of Altima products. Altima had issued 41 million
warrants in July at an exercise price of $0 .001, according
to SEC filings. Broadcom's agreement to buy Altima was
announced on July 31 . The 2 .89 million shares exceeded
the 2 .5 million shares Broadcom paid to buy the
company. Broadcom had about 220 million shares
outstanding as of Dec . 31 .
3Com is one such Altima customer . In its SEC filing for
the quarter ended in December, 3Com said it agreed to
buy $360 million worth of networking products in th e
next three years from an unspecified company that was
bought by Broadcom . A 3Com spokesman confirms the
company was Altima . As it buys the networking products,
3Com will receive warrants to buy 992,000 shares o f
Broadcom, valued at about $244 million, according to the
filing.
For rivals, it can be difficult to compete for business
against a company that is in talks to be bought by
Broadcom, because customers buying with warrants
increase their gross profit margin . How so? A customer
who gets warrants worth, say, $40 to buy $100 of
products records the cost of goods at $60, not $100 . If the
customer is selling the products for $120, then its gros s
82
1
2
3
4
5
6
7
8
9
10
11
1 2
13
14
15
16
17
18
19
20
21
22
23
24
25
26
27
28
margin is 50%, compared with 17% if it didn't get the
warrants .
Piper Jaffray's Mr. Kumar estimates that 3Com effectively
receives a 69% discount on the price of the product it
buys from Broadcom. Also, 3Com says in its filing that
there are "significant disincentives" for not meeting the
purchase requirements . According to Broadcom, i f
certain companies don't buy the amount of product they
are committed to, or buy from another supplier, there is a
cash penalty .
140 . In that same Wall Street Journal article, Broadcom admitted that with
respect to the 7.96 million shares issued in connection with the VisionTech
acquisition , more than 5 million shares were tied to warrants given to VisionTech
customers:
In its purchase last month of Israeli -based VisionTech
Ltd., which makes chips used in personal video recorders,
Broadcom said in a news release that it would issue about 7 .96
million shares, which Mr . Ruehle says includes more than five
million shares tied to warrants given to VisionTech's customers .
One of VisionTech ' s customers, Pace Micro Technology, a set-
top-box maker based in the United Kingdom, said in a news
release issued in early January that it received 277,154 shares of
Broadcom stock that vest over the next two years as it meet s
certain purchase requirements and obligations for new chip
development . It didn't disclose how much product it agreed t o
buy.
83
1
2
3
4
5
6
7
8
9
10
11
12
13
14
15
16
17
18
19
20
21
22
23
24
25
26
27
28
141 . On February 28, 2001, The Los Angeles Times also published an article
addressing Broadcom's accounting, causing the Company's stock to drop even
further. The article stated :
For nearly two years, Irvine chip maker Broadcom Corp . dazzled Wal l
Street analysts with its explosive growth and voracious appetite for
strategic acquisitions .
But now, some of the company's admirers are questioning whether
Broadcom's financial reporting practices on five acquisitions migh t
have understated the real cost to the company .
In what analysts say is an unusual arrangement , Broadcom encourage d
five companies it was acqui ring to issue warrants - rights to stock - in
their companies. The warrants were issued to customers a s
encouragement to continue purchasing products . Broadcom then
would pick up those warrant obligations in the acquisitions .
What it did next, though, has led to growing concern on Wall Street .
Critics charge that the warrants are essentially discounts on products
and that their expense should have been used to reduce revenue and
income .
84
1
2
3II
4
5
6
7
8
9
10
11
12
13
14
15
16
17
18
19
20
21
22
23
24
25
26
27
28
Broadcom instead classified the warrant expense as goodwill - an
often-overlooked category that represents the amount paid over the
value of the company acquired.
Still, critics say, Broadcom has been buying customers . News of its
accounting methods Tuesday sent the already battered stock down to a
52-week low of $53 .13 a share during regular trading . It closed at
$53 .63, down $9.38 a share .
"Any time a company offers some sort of bribe to get its products out
in the market, then that in essence reduces the net revenues obtaine d
from the sale of those products," said E . John Larsen, a professor at
USC's Leventhal School of Accounting . "This is cute accounting, and
I would not stand for it if I were the auditor," he said .
Broadcom defended the accounting method it used on five
of its 12 acquisitions last year . "I think people don' t
understand it," said William Ruehle, Broadcom's Chie f
Financial Officer. "I think some competitors don't think
this is cool because it gives us a competitive advantage . "
The accounting method was used in Broadcom's acquisitions of
Altima Communications, Inc ., Silicon Spice, Allayer Communications ,
85
1
2
3
4
5
6
7
8
9
1 0
11
12
13
14
15
16
17
1 8
19
20
21
22
23
24
25
26
27
28
SiByte Inc. and VisionTech. The warrants, if all of them are
exchanged for stock, could total about 11 million shares of Broadco m
stock, less than 5 percent of the more than 250 million Broadcom
shares currently outstanding, Ruehle said .
142 . As indicated, Defendants ' scheme to conceal Broadcom's purchase o f
revenues with warrants for its own stock, through the acquisition of start-up
companies, began to emerge in late February 2001 . Defendants' scheme is
demonstrated by (a) their conduct during the acquisitions of the start-up companies ;
(b) by Broadcom's gradual, piecemeal, confusing and inconsistent publi c
disclosures about their scheme, first in the media and later by their own admissions ;
and (c) the fact of their restatement of financial results which, pursuant to Statement
of Financial Accounting Standard No . 16, Prior Period Adjustments and
Accounting Principles Board Opinion No . 20, Accounting Changes, is required for
material accounting errors or irregularities that existed at the time the financial
statements were prepared.
143 . Defendants' acquisition of VisionTech exemplifies their conduct durin g
the acquisitions of the five start-up companies during the Class Period . As
acknowledged by Nicholas after the close of the Class Period, Broadcom itself too k
an active part in negotiating warrant deals with VisionTech' s customers .
According to Nicholas, as detailed in a March 14, 2001, article in TheStreet.com,
which reported on an interview he gave to The Marker. com in connection with the
86
1
2
3
4
5
6
7
8
9
10
11
12
13
14
15
16
17
18
19
20
21
22
23
24
25
26
27
28
VisionTech acquisition, the involvement of VisionTech's customers occurred at th e
level of Chief Executive Officer .
144. Furthermore, at least one of the warrant deals between Broadcom an d
VisionTech's customers involved only the purchase of Broadcom products. On
January 9, 2001, Pace Micro Technology, P .L.C. ("Pace"), a British company,
issued a press release :
The Board of Pace today announce that pursuant to
contracts to develop and acquire new IC Chips, Pace has
acquired an interest in 277 ,154 shares of Class A
Common Stock of Broadcom Corporation pursuant to the
exercise of warrants held by Pace, in the Israeli company ,
VisionTech Ltd., immediately prior to its acquisition by
Broadcom effective on 3 January 2001 . The Broadcom
shares acquired by Pace are expected to vest in full ove r
the course of a two-year period during which Pace i s
required to satisfy certain purchase commitments in
respect of IC chips for its digital gateway products and
certain obligations relating to the development of nex t
generation IC chips . The Stock is subject to a right of
repurchase by Broadcom whilst unvested to the extent
that Pace's purchase commitments are not met . The
87
1
2
3
4
5
6
7
8
9
10
11
12
13
14
15
16
17
18
19
20
21
22
23
24
25
26
27
28
Broadcom shares acquired by Pace when vested are freely
tradeable shares under US Securities laws by virtue o f
exemption pursuant to Section 3(a)(10) of the U S
Securities Act of 1933 . It is Pace's current expectation
that it will sell these shares as and when they vest a t
prevailing market prices.
The commitments referred to in the January 9, 2001, press release relate only to the
purchase of Broadcom products - not products of VisionTech . In essence ,
Broadcom simply used warrants for its own stock as a discount to sell its own
products. Rather than properly acknowledging the use of Broadcom warrants as a
discount on revenue from the sale of its products , Defendants utilized VisionTech
to conceal their fraudulent business acquisition accounting .
145 . Nicholas, in the month after the February 27, 2001 revelations and the
end of the Class Period, publicly acknowledged, at least in part, his lack of cando r
to investors in connection with the VisionTech acquisition . According to a Marc h
14, 2001 article in TheMarker.com, Nicholas stated:
Because we didn't just buy VisionTech's technology but also
customer undertakings for significant purchases - in fact we di d
our stockholders a favor .
The Israeli press account continues :
88
1
2
3
4
5
6
7
8
9
10
11
12
13
14
15
16
17
18
19
20
21
22
23
24
25
26
27
28
The absolute figures are fantastic: Broadcom paid VisionTech
customers shares worth $500 million dollars on the day o f
closing the deal . As a company that declares that it has neve r
funded more than 2% of its customer orders by allocatin g
options, what financial sales volumes does Broadcom expec t
VisionTech to achieve if it has decided to grant, in return for
these sales , the enormous sum of half a billion dollars? After
all, the total annual sales of the giant Broadcom itself are no
more than a billion dollars . "True", admits Nicholas, "but our
revenues are growing at a rate of 100% annually, and in the nex t
few years this sum won't be so large relatively speaking ."
(emphasis added) .
146. On March 14, 2001, The Street .com reported on an interview Nichola s
gave to The Marker .com in connection with the VisionTech acquisition . During the
interview, Nicholas admitted that Broadcom forced VisionTech to enter into the
warrant agreements as a condition of the acquisition by Broadcom. Nicholas
further stated that Broadcom officers were involved in all stages of negotiation s
relating to the warrant deals . The article reported :
The deal got good press when first announced . But later
stories turned less complimentary when the accounting
behind the figures was disclosed . The value of the dea l
89
1
2
3
4
5
6
7
8
9
10
11
12
13
14
15
16
17
18
19
20
21
22
23
24
25
26
27
28
was inflated by the allocation of options to customers of
Broadcom, VisionTech and of other startups Broadcom
bought in exchange for purchase commitments . But
Broadcom's CEO comes out swinging in defense of the
Israeli company . Nicholas said VisionTech and its
manager, Amir Morad, had been forced to grant the
allocation to customers as part of the deal. (emphasis
added) .
Insofar as is known, something over 5 million Broadco m
shares out of the 7 . 96 million shares Broadcom allocate d
for the purchase of VisionTech wended their way to
customers , instead of to VisionTech shareholders . The deal
was reportedly worth almost $800 million, but the value o f
the shares allocated to customers was no less than $50 0
million. VisionTech would up with less than three-eighth s
of the compensation .
All negotiations over warrants and orders were carried ou t
at the level of the CEO . "You can ask Malcolm Miller ,
CEO of Pace Micro Technology," Nicholas says .
(emphasis added) .
* * *
90
1
2
3
4
5
6
7
8
9
10
11
12
13
14
15
16
17
18
19
20
21
22
23
24
25
26
27
28
Another item he reveals is that Broadcom officers were
involved in all stages of negotiating the warrants-order s
deals with potential VisionTech customers . Nicholas
won't get into the roles played by VisionTech versus
Broadcom people, or the proportions between the amount
of warrants they received compared with the size of thei r
orders. (emphasis added) .
Shareholders thought Broadcom had bought only
technology but they didn't have to know that the
technology cost only $250 million, [Nicholas] explains .
They didn't have to know the company paid $500 million
for customer orders. If the market thinks Broadcom over
paid for VisionTech, it can always bring down Broadcom' s
share price . If it does well, investors will be in for a nic e
surprise when the orders start to stream in, Nicholas says .
The company prefers to under-promise and over-deliver .
The problem is that Broadcom is paying for the orders .
Using warrants that may or may not be vested, it is still
buying revenue using a currency that dilutes it s
shareholders . The structure epitomizes the massive ,
91
1
2
3
4
5
6
7
8
9
10
11
12
13
14
15
16
17
18
19
20
21
22
23
24
25
26
27
28
unrestrained use technology companies made of their
shares and warrants for shares in recent years . Nicholas
sees it differently : running a slush fund is not buying
revenues, he says, and the company decided to view th e
VisionTech customers as though they were investors .
What's the difference? he asks .
Theoretically, if the vesting price is low enough (and
Nicholas admits its pretty low) - it might pay for a
company to buy VisionTech products just to vest th e
warrants and obtain a major financial gain.
Taken alone, the figures are astounding . Broadcom is
paying $500 million worth of its shares to customers,
assuming all are vested . The company boasts that it' s
never financed more than 2% of the orders volume by way
of allocating warrants . What kind of sales is Broadcom
expecting VisionTech to generate? So far the whol e
Broadcom group is selling no more than $1 .5 billion
dollars a year.
92
1
2
3
4
5
6
7
8
9
10
11
12
13
14
15
16
17
18
19
20
21
22
23
24
25
26
27
28
147. In an interview published in Israel 's Business Arena, the English
language version of the Israeli financial daily Globes, on March 14, 2001, Nicholas
reacted to critical Globes articles which stated that the accounting methods used i n
the VisionTech acquisition inflated sales :
That doesn't explain why you didn 't report to the
Securities and Exchange Commission th e
proportion of options on the shares given t o
VisionTech that you set aside for customers.
NICHOLAS : "To report that, we would have needed the consen t
of the customers . We would have had to reveal our contracts with eac h
customer."
The question is why you didn't report the tota l
amount.
NICHOLAS : "Every customer could have deduced how many
each had received ."
How exactly could they have done that?
NICHOLAS : "It's not a problem."
One of the issues arising from the contract for
Broadcom 's acquisition of VisionTech is why, i f
everything was in order, the contract did no t
explicitly state that options described as "specia l
93
1
2
3
4
5
6
7
8
9
10
11
12
13
14
15
16
17
18
19
20
21
22
23
24
25
26
27
28
options" were designated for customers . Instead, the
contract stated that holders of these options did no t
have to pay tax in Israel .
The company lawyer admitted that this is indeed the
clause applying to the options for customers. He
explained that the company had no obligation to
provide more details .
Let's talk about the "purchasing" of your
revenue.
NICHOLAS : "There was no purchasing of revenue ."
What do you call revenue obtained by promisin g
to return a large proportion of the customer' s
payment for the product you sell him ?
NICHOLAS : "I don't know what your talking about ."
"The Wall Street Journal" reported that 3Com got
a 69% discount on the price of products and that
you did not include the discount in your financial
reports .
NICHOLAS: "The figures that were published were incorrect . I
don't recognize these numbers ."
What figures do you recognize?
94
1
2
3
4
5
6
7
8
9
10
11
12
13
14
15
16
17
18
19
20
21
22
23
24
25
26
27
28
NICHOLAS : "I don't know . I only know that we did include the
discounts in the reports under the goodwill item ."
But not in the income statements as a deductio n
from income sales .
NICHOLAS : "I don 't know how much you understand
accounting. I don't understand accounting . Ernst &
Young, our accounting firm, calculated the data fo r
us and composed the reports , and I assume they knew
what they were doing ."
You are company CEO and president . Don't you
what goes on with your own reports ?
NICHOLAS: "I trust my account ants . I tell them what I want to
present and they take care of it ."
On that point as least, we don't disagree with the
Broadcom CEO. "Furthermore, in the technology
field, it is impossible to purchase sales," he added .
"The customers buy products for the quality of th e
technology . The market even prices the share s
according to the technology ."
148 . Defendants' fraudulent conduct during the acquisition of start-up
companies is also illustrated with respect to the acquisition of Allayer. Nicholas
95
1
2
3
4
5
6
7
8
9
10
11
12
13
14
15
16
1 7
18
19
20
21
22
23
24
25
26
27
28
personally engaged in negotiations with Allayer's CEO and suggested that Allayer
use warrants to induce customer purchases . According to a former high leve l
executive of Allayer, Broadcom suggested that Allayer make use of a particular
Broadcom distributor in Asia . Promate, the distributor, had not previously been
used by Allayer . Warrants of Broadcom could then be awarded, through Allayer, to
Promate. At the time of the acquisition, Allayer's products were "mature" and no t
of significant commercial or technological value to Broadcom. In fact, because of
their "maturity ," Allayer 's products were sold almost exclusively in Taiwan -
considered a "technology follower ." By making possible the award of warrants t o
Broadcom's own distributor, the Allayer transaction provided a pretext fo r
Broadcom's use of business acquisition accounting .
149. Broadcom's use of warrants to buy its own revenue is further illustrated
by its dealing with one of its customers , Netgear. According to a high level
executive of Netgear, Broadcom offered that company warrants from another
unidentified company as a discount on Broadcom products. Consistent with the
scheme described above, Netgear's acceptance of the offer would have allowe d
Broadcom to grant discounts on its products to customers through the issuance of
warrants without a reduction of its revenue by the value of the warrants furnished .
150. On March 6, 2001, Broadcom issued a press release updating its firs t
quarter 2001 forecast . The release stated, in part :
96
1
2
3
4
5
6
7
8
9
10
11
12
13
14
15
16
17
18
19
20
21
22
23
24
25
26
27
28
Prior to their acquisition by Broadcom, several acquisition candidates-
Altima Communications, Inc ., Silicon Spice, Inc ., Allayer
Communications, SiByte, Inc ., and VisionTech, Ltd . - each executed
with key customers certain product purchase or developmen t
agreements that carried performance-based warrants . Broadcom
assumed those agreements and warrants upon consummating each
acquisition .
"We and the acquisition candidates viewed these transactions a s
a way to promote and solidify their relationships with ke y
customers, work closely with customers to define products tha t
were strategic to their needs, and secure firm commitments from
the customers to gain confidence in their demand for the
products," said Nicholas . "In doing so, the customers als o
gained an equity stake in the success of the acquired entities ,
which we believe was , and still is , very much in the interests of
Broadcom, our customers and our shareholders . "
When each acquisition candidate was acquired by Broadcom in a
purchase transaction, and its customer purchase and developmen t
agreements were assumed by Broadcom, on the advice of Broadcom' s
outside auditors, the current fair value of the warrant issuance
obligation was accounted for as an element of the consideration paid
97
1
2
3
4
5
6
7
8
9
10
11
12
13
14
15
16
17
18
19
20
21
22
23
24
25
26
27
28
by Broadcom in the acquisition. This value was fixed at the closing of
each acquisition and was recognized partially as an intangible asse t
related to the contracts and partially as goodwill paid for in th e
acquisition. Amounts assigned to the contracts were to be written off
as a reduction of revenue as purchases or co-development payments
were made by the customers, and amounts assigned to goodwill wer e
to be amortized over a five-year period. Fundamental to thi s
accounting treatment was Broadcom's and its auditors' assessment tha t
there was a high probability that the respective customers would mee t
their commitments under the purchase/development agreements,
thereby earning the right to exercise the warrants. This high
probability was in part assured through significant financial penaltie s
imposed upon the customers for not meeting the purchase or other
commitments required under the contracts .
The recent and significant slowdown in the technology sector has had
numerous consequences, including a major reduction in stock market
prices and declining customer orders . These effects have been
experienced widely in the semiconductor industry and in th e
technology sector generally . These developments, in turn, hav e
affected the economics of the product purchase and development
agreements . One such purchase agreement was between Altima, the
98
1
2
3
4
5
6
7
8
9
10
11
12
13
14
15
16
17
18
19
20
21
22
23
24
25
26
27
28
first of the five acquisition candidates purchased, and its major
customer, 3Com Corporation . On February 28, Broadcom received
notice from 3Com that it was terminating that agreement, as note d
above under "Outlook ."
In consideration of the fact that one of the purchase agreements has
been cancelled, Broadcom believes it is now reasonable to challeng e
whether from an accounting standpoint there is still a high probability
that other customers holding the warrants will meet their purchase o r
development commitments . As a result, its outside auditors have
advised Broadcom that the fixed accounting treatment may no longer
be appropriate . One alternative that has been proposed is the use of a
variable accounting model . That model assigns value to th e
outstanding warrants only when and to the extent they are earned b y
the customer and vest . The assigned value is the fair value of the
warrants when the customer earns them, and the entire value assigned
to the earned warrants in each period is treated as a deduction from the
related revenue earned under the purchase/development agreements
during that period . Given the lack of precedent in this area, the outside
auditors are still inconclusive on the appropriate accounting for thes e
contracts .
99
1
2
3
4
5
6
7
8
9
10
11
12
13
14
15
16
17
18
1 9
20
21
22
23
24
25
26
27
28
151 . On March 20, 2001, TheStreet.com published an article regarding
Broadcom's decision to change the way it accounted for the warrant transactions :
Communications chip company Broadcom
(BRCM:Nasdaq-news) changed the accounting method on
warrants related to its purchase of Israel's VisionTech and
said it may restate earnings to reflect a similar change with
a previous acquisition, according to documents file d
Monday with the Securities and Exchange Commission .
Broadcom earlier this month warned of weak revenue and
said that it was in consultations with the SEC over how it
should account for warrants held by the customers o f
companies it purchased . Warrants related to the
VisionTech purchase will be accounted for as a reduction
in revenue as they vest, the filing states .
In the filing, Broadcom also said it may restate earnings for
the nine months ending September 30, 2000, because of
changes in the way it accounts for its purchase of Altima
Communications last year.
Broadcom purchased numerous companies in 2000 whose customers
hold warrants that allow them to buy Broadcom shares if they follo w
through on agreements to purchase products . Broadcom cited the loss
of such an agreement from customer 3Com (COMS : Nasdaq -ed the
list of acquisitions impacted by the acco news) as one of the reasons i t
was reviewing its warrants practice .
100
1
2
3
4
5
6
7
8
9
10
11
12
13
14
15
16
17
18
19
20
2 1
22
23
24
25
26
27
28
152 . As noted in a follow-up article in TheStreet.com, on March 21, 2001 ,
Broadcom quickly expanded the list of acquisitions subject to the accountin g
change:
In a statement Wednesday, Broadcom expanded the list of
accounting changes to include three other acquisitions in
the second half of 2000 - Allayer, Silicon Spice and
SiByte. In addition, Broadcom said it's trying to cancel
some warrant agreements .
153 . On March 21, 2001, Broadcom announced that it had completed its
accounting review of the warrant-related transactions . In its press release,
Broadcom indicated that it would restate its financial statements for the third
quarter of 2000, by eliminating balance sheet entries for purchased intangible assets
and goodwill related to the assumed agreements and warrants, as well as income
statement charges for amortization of those assets . The Company further stated that
Broadcom common stock issued or issuable upon exercise of the assumed warrants
would now be recorded pro rata as a reduction of revenue as the warrants are earned
by customers . The Company also announced a revision of its previousl y
announced fourth quarter 2000 financial statements which had accompanied the
Company's earnings press release of January 23, 2001 . The Company reduced
revenue by $38 .6 million (or 10 percent) for the fourth quarter for the value of the
warrants earned during that quarter . The reduction of fourth quarter sales by 10
percent also lowered annual sales by 3 .4 percent and sequential quarterly revenue
growth from 18.6 percent to 6.5 percent. Had Broadcom properly accounted for the
warrants in accordance with GAAP, it would not have met market expectations for
the fourth quarter 2000 .
154 . On March 22, 2001, Broadcom revised its 2000 financial results . The
March 22, 2001, edition of The Wall Street Journal reported:
101
1
2
3
4
5
6
7
8
9
10
11
12
13
14
15
16
1 7
18
19
20
21
22
23
24
25
26
27
28
Broadcom Corp. revised its 2000 financial results to change the way it
accounts for warrants granted to customers of companies it acquired .
The changes create a second, smaller measure of revenue, but improve
the chip maker's bottom line .
Broadcom, of Irvine, Calif., also said it had terminated nine of the 13
contracts that included the warrants, meaning that the accountin g
treatment will be much less of an issue in the future .
In essence, Broadcom said it would now treat the warrants as an
adjustment to its revenue . Previously, Broadcom had been treating the
warrants primarily as a goodwill expense of the acquisitions, which
would be written off over many years . Broadcom said it made the
change after consultations with its auditors, Ernst & Young, and the
Securities and Exchange Commission .
The changes address investor complaints that the warrants were
effectively customer discounts, and that Broadcom had used them to
inflate its revenue and gross margin. Five companies that Broadcom
acquired last year issued the warrants, at Broadcom's urging, to lock
up long-term contracts with customers .
The revised results present two measures of revenue : gross revenue
and net revenue, which subtracts the value of the warrants . In the
fourth quarter of last year, subtracting the value of the warrants
reduced Broadcom's revenue by 10%, to $340 .2 million, from $378 . 8
million.
Paradoxically, the changes improve Broadcom's bottom line, by
eliminating the goodwill expense . In the revised results, Broadcom
reported a loss of $687 .8 million, or $3 .13 a share, for last year ,
compared with its initially reported loss of $693 .4 million, or $3 .15 a
share.
102
1
2
3
4
5
6
7
8
9
1 0
1 1
12
13
14
1 5
1 6
1 7
18
19
20
21
22
23
24
25
26
27
28
Broadcom said the changes would have minimal or no impact on the
pro forma results that it reports, and which are closely tracked on Wall
Street. That is because Broadcom excludes both the goodwill charge
and the revenue adjustment from these results .
Broadcom said it had terminated most of the contracts because of the
significant change in business and market conditions since they were
signed last year . First, Broadcom's customers have seen their own
business decline and so don't need the chips as much . Second,
Broadcom's shares, which reached as high as $274 last summer, have
lost almost 90% of their value, making the warrants, which carried
strike prices of less than a penny, much less valuable .
155 . On March 30, 2001 , Broadcom filed an amended Form 10-Q report fo r
the third quarter of 2000 in which it restated its September 30, 2000 financial
statements. Note 9 to these restated financial statements disclosed that, as a result
of its application of a new accounting methodology with respect to the
performance-based warrants assumed in the Altima acquisition, (a) $689 .4 million
originally recorded as additional paid-in capital in connection with the acquisition
to reflect the value assigned to the assumed performance-based warrants, together
with an equal amount assigned to goodwill and purchased intangible assets to
account for the value of assigned to these warrants, have been removed from the
September 30, 2000 balance sheet, and (b) $8 .9 million of related amortization
expense has been removed from the statement of operations for the three and nine
months ended September 30, 2000, and (c) after accounting for the related income
tax effect, the result of these revisions is to increase reported operating results by
approximately $5 .3 million.
DEFENDANTS' SCIENTER
156 . Defendants acted with actual knowledge that their conduct woul d
mislead buyers of Broadcom stock, as well as with deliberate recklessness in tha t
103
1
2
3
4
5
6
7
8
9
10
11
12
1 3
14
15
16
17
18
19
20
21
22
23
24
25
26
27
28
regard. Further, Defendants' conduct was an extreme departure from the standards
of ordinary care in that Defendants either knew, or it was so obvious that they must
have known, that their conduct would mislead buyers of Broadcom stock .
Defendants' fraudulent conduct, as alleged here, was for the purpose of maintainin g
the illusion of continuous revenue growth . Defendants were acutely aware that th e
price of Broadcom stock depended on continued revenue growth .
157. The following facts are evidence of Defendants' involvement in the
fraudulent revenue growth scheme and also give rise to a strong inference that
Defendants acted with scienter. Defendants' scienter is established by numerou s
allegations, primarily relating to Defendants' failure to disclose material
information relative to the performance based warrant transactions entered into wit h
customers of the acquired companies . Defendants' scienter is further evidenced by
Defendants ' violation of GAAP and insider sales .
Defendants ' Statements And Conduct Are Evidence Of Scienter
158 . Defendants, in failing to properly disclose material information relativ e
to the performance-based stock warrants issued to customers of acquired
companies, intentionally misled investors during the Class Period . Defendants
deliberately omitted material information related to Broadcom's acquisitions, which
was required to make the statements made not materially misleading . Specifically,
Defendants did not disclose : (a) Broadcom's role in warrant agreements entered
into between the acquired companies and their customers; (b) the amount of
reduction in the revenue to Broadcom which would occur as a result of the warrant s
issued to the customers if accounted for properly ; (c) the value of the warrants
issued to customers ; (d) the exercise price of the customer warrants ; and (e) with
regard to certain acquisitions, that any warrants were issued to or shares were
reserved for the acquired company's customers . Investors were not aware that
Broadcom, in acquiring the companies, actually purchased its own revenues
through customer warrants .
104
1
2
3
4
5
6
7
8
9
10
11
12
13
14
15
16
1 7
18
19
20
21
22
23
24
25
26
27
28
159 . Each of Broadcom's false and misleading press releases relating to the
five acquisitions were reviewed and/or approved by the Individual Defendants .
Each press release omitted material, adverse information regarding the customer
warrant transactions . Each press release designated Ruehle as the contact person
for questions from the analyst community regarding the information contained in
the releases . Each of the press releases was incorporated by reference in a Form 8-
K signed by Ruehle and filed by Broadcom with the SEC shortly after each
announcement .
160. Each merger or acquisition agreement was negotiated by the Individua l
Defendants . Nicholas signed each of the acquisition agreements . Each agreement
includes the reservation of Broadcom shares for future issuance to customers upon
the exercise of performance-based warrants . In total, approximately 11 million
shares were reserved. Such share dilution would have necessarily required the
approval of the Individual Defendants. Each of the acquisition agreements was
incorporated by reference into Broadcom's Form 8-Ks signed by Ruehle and filed
with the SEC .
161 . As specifically noted in the Company press releases discussed herein ,
the Broadcom Board of Directors reviewed and approved each acquisition .
Nicholas and Samueli were at all relevant times Co-Chairman of the Board o f
Directors .
162 . As expressly stated in Broadcom 's SEC filings, Nicholas and Samueli
control Company management and each merger required their approval.
163 . In Broadcom's Year 2000 Form 10-K, signed by Nicholas, Samueli and
Ruehle, and issued on or about April 2, 2001, after the close of the Class Period,
Broadcom unequivocally acknowledges its direct role in the customer warrant
transactions and the determination of accounting methods used relative to those
warrants :
105A
1
2
3
4
5
6
7
8
9
10
11
12
13
14
15
16
17
18
19
20
21
22
23
24
25
26
27
28
• "During the course of negotiating the acquisitions of Altima, Silicon
Spice, Allayer and SiByte we challenge each company's management to
substantiate its assertions regarding the value and market acceptance o f
the company's technologies and products by securing significant purchas e
and development commitments from key or strategic industry customers . .
. ." (emphasis added) .
• "We presented these companies with the concept of issuing performance-
based warrants to obtain long-term commitments from customers . . . . "
(emphasis added) .
• "Because the performance-based warrants would be assumed by us if a n
acquisition were to occur, we provided technical assistance and advice t o
each company's management to assure that the performance-based
warrants would be structured to qualify for fixed accounting unde r
Emerging Issues Task Force ("EITF") issue 96-18 . . . ." (emphasi s
added) .
• "At the time we assumed the warrants and related purchase an d
development agreements, we determined, in consultation with our
independent auditors , that fixed accounting , with the date of acquisition as
the valuation measurement date, was required . . . ." (emphasis added) .
106
1
2
3
4
5
6
7
8
9
10
11
12
13
14
15
16
17
18
19
20
21
22
23
24
25
26
27
28
• "In our evaluation [of accounting for the performance-based warrants and
related development agreements] we considered the significance of the
cash penalties in relation to both the amounts in each purchase an d
development agreement and the financial statements of the customers, the
effect of forfeiture of the value of the warrants, and the intent and abilit y
of customers to purchase the required products and development service s
under the agreements ." (emphasis added) .
164. The restated Form 10-Q for the quarter ending September 30, 2000 ,
signed by Ruehle, and issued on or about March 30, 2001, after the close of the
Class Period, confirms Broadcom's involvement in accounting for performance-
based warrants :
"(Following guidance it received from its independent auditors ,
the Company initially accounted for the performance-base d
warrants under the provisions of APB 16 .) Upon completion of
this accounting review, which involved consultation with th e
staff of the Securities and Exchange Commission, i n
accordance with the revised guidance from its independen t
auditors, the Company has revised the accompanying
September 30, 2000 condensed consolidated financia l
statements to apply the provisions of EITF D-90 t o
performance-based warrants assumed in the Altima
acquisition . "
165 . In the Broadcom March 6, 2001 press release , the Company also
acknowledged its direct role in the warrant transactions and related determination o f
accounting methods :
107
1
2
3
4
5
6
7
8
9
10
11
12
13
14
15
16
1 7
18
19
20
21
22
23
24
25
26
27
28
Broadcom assumed those agreements and warrants on
consummating each acquisition. "Both we and the acquisition
candidates viewed these transactions as a way to promote and
solidify their relationships with key customers, work closely
with customers to define products that were strategic to their
needs and secure firm commitments from the customers to gain
confidence in their demand for the products." said Nicholas .
(emphasis added) .
The press release also notes Broadcom's acknowledgment that the current fair value
of the warrant issuance obligation was accounted for as an element of the
consideration paid by Broadcom in the acquisition and recognized partially as
goodwill paid for in the acquisition . (emphasis added) .
166. The same March 6, 2001 Company press release further states tha t
"Fundamental to this accounting treatment was Broadcom's and its auditors
assessment that there was a high probability that the respective customers would
meet their commitments under the purchase/development agreements, thereby
earning the right to exercise the warrants ." The press release goes on to state that in
light of the cancellation of one of the purchase agreements, "Broadcom believes it
is now reasonable to challenge whether from an accounting standpoint there is still
a high probability that other customers holding the warrants will meet their
purchase or development commitments ." (emphasis added) .
167. Finally, Nicholas himself admits in the March 6, 2001 press release tha t
Broadcom was fully aware of and determined the method of accounting for the
customer warrants : "At every step of the way, our auditors have been fully involved
in assisting us in determining the most appropriate accounting for these unique
circumstances , and we have always made prompt and full disclosure of all relevant
facts and circumstances to them," Nicholas said . "Moreover, we have always been
108
1
2
3
4
5
6
7
8
9
10
11
1 2
13
14
15
16
17
18
19
20
21
22
23
24
25
26
27
28
in full agreement with our outside auditors as to the accounting for the
performance-based warrant arrangements." (emphasis added).
168 . The Individual Defendants' knowledge of and involvement in the
fraudulent revenue growth scheme, the accounting for the warrants and its impact
on the Company's growth is also evidenced by their own Class Period statements to
the media :
(a) An interview reported in TheStreet.com stated : Shareholders thought
Broadcom had bought only technology but they didn't have to know that th e
technology cost only $250 million [Nicholas] explains . They didn't have to know
the company paid $500 million for customer orders . If the market thinks Broadcom
overpaid for VisionTech, it can always bring down Broadcom's share price . March
14, 2001, The Street.com.
(b) Nicholas confirmed that "Broadcom officers were involved in al l
stages of negotiating the warrant-orders deals with potential VisionTech
customers ." March 14, 2001, TheStreet. com .
(c) Nicholas admitted that Broadcom forced VisionTech to enter into th e
warrant agreements as a condition of the acquisition by Broadcom . March 14 ,
2001, The Marker.com .
(d) In acknowledging his awareness of the revenue growth scheme and the
chosen method to account for the warrants, Nicholas stated: "Because we didn' t
just buy VisionTech's technology but also customer undertakings for significant
109
1
2
3
4
5
6
7
8
9
10
11
12
13
14
15
16
17
18
19
20
21
22
23
24
25
26
27
28
purchases - in fact we did our stockholders a favor ." March 14, 2001, Th e
Marker. com .
(e) In an interview published in Israel's Business Arena on March 14 ,
2001, Nicholas notes : "I only know we did include the discounts in the report s
under the goodwill item ."
(f) In reporting on an interview with Nicholas The Street. com notes :
The problem is that Broadcom is paying for orders . Using
warrants that may or may not be vested, it is still buyin g
revenue using a currency that dilutes its shareholders . The
structure epitomizes the massive, unrestrained use
technology companies made of their shares and warrants
for shares in recent years . Nicholas sees it differently.
Running a slush fund is not buying revenues, he says, an d
the company decided to view the VisionTech customers a s
though they were investors . What's the difference? he
asks. March 14, 2001, TheStreet.com.
(g) In responding to questions surrounding the legitimacy of the warran t
transactions, Ruehle stated: "I don't think there's anything to be concerned about ."
He adds that the Company works extensively with its accountants on how to treat
the contracts and the acquisitions . The Company sometimes encourages the use of
warrant-related sales agreements at target companies, and Mr. Ruehle says it makes
110
1
2
3
4
5
6
7
8
9
10
11
12
13
14
15
16
17
18
19
20
21
22
23
24
25
26
27
28
sense for Broadcom to get these commitments so that it can be sure the acquired
company can meet its acquired goals . "Last time I checked, aggressive marketin g
practices are okay ." (emphasis added). February 27, 2001, The Wall Street
Journal.
(h) The same article goes on to state : Broadcom says it doesn't think th e
contracts , or the way it treats them, inflate its revenue or its gross profit margin,
calling revenue related to such agreements "insignificant." February 27, 2001, The
Wall Street Journal.
(i) In discussing the VisionTech acquisition , the February 27, 2001 Wall
Street Journal article reflects Ruehle's knowledge of the warrant scheme : "In its
purchase last month of Israeli-based VisionTech Limited, which makes chips use d
in personal video recorders, Broadcom said in a news release that it would issu e
about 7.96 million shares, which Mr. Ruehle says includes more than 5 millio n
shares tied to warrants given to VisionTech' s customers .
(j) Similarly, in discussing the warrant transactions in a February 28 ,
2001 article in The Los Angeles Times :
Ruehle defended the accounting method [Broadcom] use d
on five of its twelve acquisitions last year . " I think people
don't understand it," said William Ruehle, Broadcom's
Chief Financial Officer. "I think some competitors don' t
111
1
2
3
4
5
6
7
8
9
10
11
12
13
14
15
1 6
17
18
19
20
2 1
22
23
24
25
26
27
28
think this is cool because it gives us a competitive
advantage . "
The article goes on to state that :
The accounting method was used in Broadcom' s
acquisitions of Altima Communications, Inc ., Silicon Spice ,
Allayer Communications, SiByte Inc . and VisionTech. The
warrants, if all of them are exchanged for stock, could tota l
about 11 million shares of Broadcom stock, less than 5% o f
the more than 250 million Broadcom shares currentl y
outstanding, Ruehle said .
169 . Defendants' scienter is further exemplified by the conduct an d
statements of Nicholas in connection with Broadcom's acquisition of VisionTech .
As indicated in ¶¶ 143-146, Nicholas admitted that both he and others acting on
Broadcom's behalf directly negotiated warrant deals with Pace . Prior to
Broadcom's acquisition of VisionTech, no transaction had ever occurred between
Broadcom and Pace. Pace, a VisionTech customer, ultimately agreed to accept
VisionTech warrants - convertible to Broadcom warrants - for its purchase o f
Broadcom products. Defendants, and Nicholas in particular, knew that Broadcom
revenue gained from Pace's purchases would have to be reduced by the value of th e
warrants as exercised if the warrants were accounted for in accordance with GAAP.
Defendants also knew that the Broadcom warrants could not be given directly to
Pace without making certain disclosures on the Company ' s financial statements .
By using VisionTech ' s acquisition as a subterfuge, Defendants deliberately set out
to mislead Broadcom investors with respect to present and future revenues receive d
112
1
2
3
4
5
6
7
8
9
10
11
from Pace's purchases . Defendants worked the same deception in connection with
warrants given to other customers of VisionTech, and customers of other acquired
companies .
170 . After the Class Period, Nicholas publicly acknowledged his lack of
candor to the investment community on the question of warrants given VisionTech
investors :"We decided to relate to the portion we transferred to the
customers as if they were part of VisionTech' s investors,
and not to speak about it. What's the difference? After all ,
the customers have also contributed a great deal to the
12
13
14
15 Further :
16
17
18
19
20
21
22
23
24
25
26
27
28
company, apparently more than any strategic investor, for
example . "
Shareholders thought Broadcom had bought only
technology but they didn't have to know that the
technology cost only $250 million [Nicholas] explains .
They didn' t have to know the company paid $500 million
for customer orders . If the market thinks Broadcom over
paid for VisionTech, it can always bring down
Broadcom's share price . (emphasis added) .
The statements, published in The Marker.com and The Street.com, respectively, on
March 14, 2001, are explicit admissions by Nicholas that he and the other
Defendants had deliberately "decided" "not to speak about it ." In other words, that
113
1
2
3
4
5
6
7
8
9
10
11
12
13
14
15
16
17
1 8
19
20
21
22
23
24
25
26
27
28
Defendants had deliberately determined to be silent to investors about critica l
material facts .
171 . As described above, Nicholas was also personally responsible for
suggesting to acquisition target Allayer, during negotiations with Allayer that it
make use of warrants to buy revenue . In those negotiations, Defendants went so far
as to suggest to Allayer that it award these warrants to a distributor Broadcom used
in Asia named Promate . By this suggestion, Defendants were able, through the
Allayer acquisition, to put Broadcom warrants in the hands of Broadcom's
distributor Promate for the purpose of exaggerating Broadcom's revenues . In so
doing, Nicholas and the other Defendants acted intentionally to deceive the stock
buying public with respect to Broadcom's present and future revenue .
172 . Defendants also acted with actual knowledge that their conduct woul d
mislead investors with respect to the legitimate business purposes and the success
of Broadcom's program of business acquisitions. In fact, Defendants knew that the
acquisition program was a deception to the extent that the acquisition prices paid in
Broadcom stock were actually significantly less than represented. Significant
portions of Broadcom's common stock were reserved for customer warrants (to buy
revenue). For example, Nicholas publicly acknowledged, in mid-March 2001, that
the number of warrants for Broadcom stock in the VisionTech acquisition issued to
customers made the transaction, on its face, in effect fantastic and speculative. In
particular, of the publicly announced 7.96 million shares that Broadcom paid for
VisionTech, customers received warrants for approximately 5 .7 million shares,
worth nearly $500 million at the time the acquisition closed . That amount was
approximately half of all of Broadcom's sales for 2000 and dwarfed VisionTech's
sales of approximately $1 million by 500 to 1 . Asked about this disparity in his
interview published in TheMarker.com on March 14, 2001, Nicholas stated : "True,
but our revenues are growing at a rate of 100% annually and in the next few years
this sum won't be so large relatively speaking." This admission by Nichola s
114
1
2
3
4
5
6
7
8
9
10
1 1
12
1 3
1 4
15
16
17
1 8
19
20
21
22
23
24
25
26
27
28
demonstrates Defendants' actual knowledge of the hugely speculative nature of the
transaction and his failure to disclose it during the Class Period . The investing
public obviously would have had a wholly different view of the VisionTech
acquisition if Nicholas' admitted views had been made known in a timely manner .
The Accounting Improprieties Are Additional Evidence Of Sciente r
173 . The improper accounting methods which served as the vehicle by whic h
Defendants were able to carry out their fraudulent revenue growth scheme provide
additional evidence of scienter . As described in detail in ¶¶ 137; 183-187 herein
and reflected in their financial and other statements made in press releases and filed
with the SEC during the Class Period, Defendants violated GAAP by including the
value of the warrants as part of the purchase prices of the companies it acquired, as
opposed to treating them as unissued for accounting purposes until the warrants
were exercised and vested, and then recording them as a reduction of revenue . This
resulted in the creation of additional goodwill, a balance sheet asset considered
extraneous to operating performance by investors and financial analysts .
174. Defendants' conduct was admittedly deliberate and allowed them t o
maintain the illusion of Broadcom ' s revenue growth - and meet both Company and
analysts' revenue projections throughout the Class Period .
175 . As described in ¶¶ 156-172 above, the Individual Defendants were no t
only aware of this accounting treatment, but they played a significant role i n
ensuring that the accounting treatment was utilized by Broadcom .
176. Broadcom was forced to restate its third quarter financial statements for
2000 and revise its announced results for its fou rth quarter 2000 . Under GAAP,
restatement is the most serious remedy, reserved only for situations in which no
lesser remedy is available . Under Statement of Financial Accounting Standard No .
16, Prior Period Adjustments and Accounting Principles Board Opinion No . 20,
Accounting Changes, restatements are only permitted - and are required - for
material accounting errors or irregularities that existed at the time the financia l
115
1
2
3
4
5
6
7
8
9
10
11
12
1 3
14
15
16
17
18
19
20
21
22
23
24
25
26
27
28
statements were prepared . Broadcom's revenues, as restated, would not have me t
Company and analysts' revenue growth projections .
Individual Motives Provide Evidence Of Scienter
177 . While Broadcom's top insiders were issuing favorable statements about
Broadcom 's business , the Individual Defendants (including entities they
beneficially owned) sold over 2 .4 million shares of Broadcom common stock, for
proceeds of over $390 million, to personally profit from the artificial inflation in
Broadcom's stock price which their fraudulent scheme had created .
Notwithstanding their access to confidential information as a result of their status as
officers and insiders of the Company, and their corresponding duty to disclose
adverse material facts before trading in Broadcom stock, the Individual Defendants
sold significant and material amounts of Broadcom shares at artificially inflate d
prices in order to profit from the fraud, and did so while in possession of material
non-public information. This is true despite the recognition by Lead Plaintiff that a
substantial number of shares were sold by the Individual Defendants prior to the
beginning of the Class Period. The Individual Defendants' insider sellin g
(including that of entities they beneficially owned) during the Class Period is
detailed below:
178 .Insider Position Date Shares
SoldPrices Proceeds
Nicholas CEO 8/2/00 17,000 $220 $3,740,0008/3/00 3,750 $220 $825,0008/3/00 13,250 $220 $2,915,0008/3/00 17,000 $225 $3,825,0008/9/00 15,000 $246 $3,690,0008/10/00 52,154 $225 .1875 $11,744,4288/16/00 15,000 $240 $3,600,0008/17/00 40,000 $246.1269 $9,845,0768/18/00 2,000 $254.641 $509,2828/18/00 45,000 $254.6 $11,457,0008/22/00 2,000 $263 $526,0008/22/00 17,000 $262 $4,454,000
8/22/00 24,000 $260 $6,240,000
116
1
2
3
4
5
6
7
8
9
10
11
12
13
14
15
16
17
18
19
20
21
22
23
24
25
26
27
28
8/23/00 2,500 $260 $650,0008/23/00 17,500 $262.552 $4,594,6608/23/00 20,000 $262.5 $5,250,0008/23/00 20,000 $265 .281 $5,305,6208/24/00 20,000 $270.1888 $5,403,7768/24/00 20,000 $272.297 $5,445,9408/28/00 16,000 $266.009 $4,256,1448/29/00 18,000 $252 $4,536,0008/29/00 20,000 $251 $5,020,0008/29/00 20,000 $251 .125 $5,022,5008/30/00 6,000 $238.5 $1,431,0008/30/00 11,000 $252.333 $2,775,6638/31/00 25,000 $237.609 $5,940,22511/9/00 25,000 $208.12 $5,203,000
11/10/00 50,000 $170.82 $8,541,00011/15/00 6,250 $170.266 $1,064,16211/15/00 43,750 $170.266 $7,449,13 712/18/00 100,000 $105.4375 $10,543,7501/30/01 25,000 $115 $2,875,0002/7/01 25,000 $85.575 $2,139,375
2/12/01 25,000 $81 .00 $2,025,0002/14/01 25,000 $79.419 $1,985,4752/15/01 62,500 $86.7843 $5,424,01 82/15/01 37,500 $86.7843 $3,254,41 12/20/01 100,000 $67.336 $6,733,6002/21/01 25,000 $65 .55 $1,638,75 02/22/01 50,000 $64.113 $3,205,65 02/23/01 125,000 $62.4 $7,800,000
TOTAL 1,204 ,154 $188 ,884,64 2
Ruehle CFO 8/8/00 5,000 $245 $1,225,00 08/9/00 10,000 $246 $2,460,0008/18/00 5,000 $254.641 $1,273,2058/21/00 5,000 $260 $1,300,0008/22/00 5,000 $263 $1,315,0008/23/00 5,000 $260 $1,300,0008/23/00 5,000 $262 .552 $1,312,7608/23/00 5,000 $261 .125 $1,305,62 511/15/00 10,000 $170.063 $1,700,6301/30/01 10,000 $113 .125 $1,131,250
TOTAL 65,000 $14 ,323,470
Samueli CTO 8/2/00 17,000 $220 $3,740,0008/3/00 3,750 $220 $825,0008/3/00 13,250 $220 $2,915,0008/3/00 17,000 $225 $3,825,000
117
1
2
3
4
5
6
7
8
9
10
11
12
13
14
15
16
17
18
19
20
21
22
23
24
25
26
27
28
8/9/00 1,000 $246 $246,0008/9/00 14,000 $246 $3,444,000
8/10/00 52,154 $225 .1875 $11,744,4288/16/00 15,000 $240 $3,600,000
8/17/00 40,000 $246.1269 $9,845,076
8/18/00 45,000 $254.6 $11,457,000
8/22/00 2,000 $263 $526,0008/22/00 17,000 $262 $4,454,0008/22/00 24,000 $260 $6,240,000
8/23/00 2,500 $260 $650,0008/23/00 17,500 $262.552 $4,594,6608/23/00 20,000 $262.5 $5,250,0008/23/00 20,000 $265 .281 $5,305,620
8/24/00 20,000 $270.188 $5,403,760
8/24/00 20,000 $272.297 $5,445,9408/28/00 16,000 $266.009 $4,256,144
8/29/00 18,000 $252 $4,536,0008/29/00 20,000 $251 $5,020,0008/29/00 20,000 $251 .125 $5,022,500
8/30/00 6,000 $238 .5 $1,431,0008/30/00 11,000 $252.333 $2,775,6638/31/00 25,000 $237.609 $5,940,225
11/9/00 25,000 $208.12 $5,203,00011/10/00 50,000 $170.822 $8,541,10011/15/00 43,750 $170.266 $7,449,13 711/15/00 6,250 $170.266 $1,064,16612/18/00 100,000 $105.4375 $10,543 .7501/30/01 25,000 $115 $2,875,0002/7/01 25,000 $85 .57 $2,139,25 0
2/12/01 25,000 $81 .00 $2,025,0002/14/01 25,000 $79.41 $1,985,2502/15/01 100,000 $86.78 $8,678,0002/20/01 100,000 $67.336 $6,733,6002/21/01 25,000 $65 .55 $1,638,7502/22/01 50,000 $64.113 $3,205,6502/23/01 125,000 $62 .4 $7,800,000
TOTAL 1,202 ,154 $188 ,374,699
179. In addition to the sheer magnitude of the Individual Defendants' inside r
sales, the Individual Defendants' knowledge of the adverse undisclosed fact s
described above is suggested by the timing and type of their enormous sales durin g
118
1
2
3
4
5
6
7
8
9
10
11
1 2
13
14
15
1 6
1 7
1 8
19
20
21
22
23
24
25
26
27
28
the Class Period. For example, a disproportionate number of the Individua l
Defendants' sales of stock occurred in roughly the last month of the Class Period -
after the Company made its January 23, 2001 announcement regarding fourth
quarter and fiscal year 2000 revenue and earnings (which it later revised), bu t
before The Wall Street Journal article disclosing the warrant scheme was published .
Thus, in the roughly one month period of January 23, 2001 through February 26 ,
2001, both Nicholas and Samueli sold 500,000, or 42% of the approximately 1 .2
million shares of Broadcom stock they sold in the entire seven-month Class Period .
This unusual and suspicious amount of stock sales strongly suggests the Individua l
Defendants' knowledge of the adverse undisclosed facts noted above .
180 . Furthermore, the disproportionate number of the Individual Defendants '
sales of stock coincided with the SEC's discovery of Broadcom's improper
accounting methods . According to The Los Angeles Times, Broadcom's accountin g
methods had been subject to SEC scrutiny since early February 2001 . On March 7 ,
2001, The Los Angeles Times reported that "[t]he accounting method was brough t
to the attention of SEC officials more than a month ago by another technolog y
company" (emphasis added) . In other words, the Individual Defendants '
disproportionate stock sales occurred after the SEC learned of Broadcom' s
improper accounting .
181 . Moreover, as described in Broadcom's Proxy Statements dated March
27, 2000 and April 27, 2001, and depicted below, virtually all of the Broadco m
119
1
2
3
4
5
6
7
8
9
10
11
12
13
14
15
16
17
18
19
20
21
22
23
24
25
26
27
28
common stock held by the Individual Defendants was Class B common stock . As
of March 3, 2000:
Shares of Class A
Common Stock Class B
Insider Beneficially Held Beneficially Held
Nicholas ------------------ 35,355,150
Samueli 4 35,351,500
Ruehle 4,976 1,069,768
As of March 30, 2001 :
Shares of Class A
Common Stock Class B
Insider Beneficially Held Beneficially Held
Nicholas 107 33,518,799
Samueli 146 33,475,030
Ruehle 6,649 956,268
182 . As noted above, although Broadcom Class B common stock was not
publicly traded, it was convertible at any time at the option of each of the Individual
Defendants . Because the Individual Defendants had virtually no Class A common
stock, it appears their massive public sales were set up by their conversion of some
of their Class B shares. However, exchanging their Class B common stock came at
a great cost to the Individual Defendants because, unlike the Class A stock, Class B
stock afforded voting rights of 10 votes per share . Thus, selling their shares truly
equated with giving up control . This raises the inference that the Individual
120
1
2
3
4
5
6
7
8
9
1 0
11
12
13
14
15
16
1 7
18
19
20
21
22
23
24
25
26
27
28
Defendants' need to sell during the Class Period was so important as to influenc e
them to cede portions of their control of the Company.
GAAP/SEC REGULATION VIOLATIONS
183 . The Company 's financial statements and other public statements
alleged above were materially misleading when made by virtue of the Company' s
failure to sufficiently disclose and properly account for stock warrants given to
customers .
184. The SEC requires that publicly-traded companies present their financial
statements in accordance with GAAP. 17 C.F .R. § 210.4-01 (a)(1). Financial
statements filed with the SEC that are not prepared in accordance with GAAP "will
be presumed to be misleading or inaccurate, despite footnote or other disclosures,
unless the Commission has otherwise provided ." 17 C.F.R. § 210 .4-(a)(1) .
185 . Defendants' improper accounting for warrants issued to customers, at a
minimum, violated the following GAAP principles:
(a) The principle that financial reporting should provide information tha t
is useful to present and potential investors and creditors and other users in makin g
rational investment, credit and similar decisions (FASB CON 1, par . 34) ;
(b) The principle that financial reporting should provide information abou t
the economic resources of an enterprise, the claims to those resources, and th e
effects of transactions, events, and circumstances that change resources and claim s
to those resources (FASB CON 1, par . 40);
(c) The principle that financial reporting should provide information abou t
an enterprise ' s financial performance during a period (FASB CON 1, par. 42);
(d) The principle that financial reporting should provide information about
how management of an enterprise has discharged its stewardship responsibility to
owners (stockholders) for the use of enterprise resources entrusted to it (FAS B
CON 1, par . 50) ;
121
1
2
3
4
5
6
7
8
9
10
11
12
13
14
15
16
17
18
19
20
21
22
23
24
25
26
27
28
(e) The principle that financial statements contain and disclose relevan t
and timely information (FASB CON 2 , pars . 46-57);
(f) The principle that accounting information should be reliable as well a s
relevant so that users can depend on it to represent the economic conditions o r
events that it purports to represent (FASB CON 2, pars . 58-62);
(g) The principle of completeness, which means that nothing material i s
left out of the information that may be necessary to insure that it validly represent s
what it purports to represent (FASB CON 2, par . 79) ;
(h) The principle that conservatism be used as a prudent reaction to
uncertainty to try to ensure that uncertainties and risk inherent in business situations
are adequately considered (FASB CON 2, par. 95);
(i) The principle that interim financial reporting should be based upon the
same accounting principles and practices used to prepare annual financia l
statements (APB Opinion No . 28, par. 10);
(j) The principle that transactions be accounted for according to their
substance, not their form (FASB CON 2, par . 160; SAS 69; par. 006).
186. Defendants also violated the matching principle of accounting . By not
offsetting revenues with a charge for the value of the warrants, the Company failed
to properly match its revenues and expenses . Instead of recognizing the customer
warrant costs at the time the purchase commitments had been fulfilled and the
related revenues were recognized, Defendants mischaracterized those warrants as
goodwill and amortized their value over a period of five years, regardless of when
the purchase requirements were actually met and the warrants became exercisable .
187 . Finally, Broadcom's financial statements violated GAAP and SEC
financial reporting requirements set forth in the following authoritative
pronouncements :
(a) EITF Issue No . 96-18, Accountingfor Equity Instruments That Are
Issued to Other Than Employees for Acquiring, or in Conjunction with Selling,
122
2
3
4
6
7
8
9
10
11
12
13
14
15
16
17
18
1 9
20
21
22
23
24
25
26
27
28
Goods or Services . This pronouncement reflects an observation of the FASB staff
that sales incentives in the form of equity instruments (like Broadcom's warrants)
should be measured at the fair value of the sales incentive or the fair value of the
equity instruments issued, whichever is more reliably measurable, and a consensus
of the Emerging Issues Task Force that the issuer should measure the fair value of
the equity instruments using stock price and other measurement assumptions as a
measurement date which is the earlier of (1) the date at which a performance
commitment by the counterparty (the customers in Broadcom's circumstances) to
earn the equity instruments is reached or (2) the date at which the counterparty's
performance is complete . The pronouncement defines a performance commitment
as a commitment under which performance by the counterparty to earn the equity
instruments is probable because of sufficiently large disincentives for
nonperformance. It defines counterparty performance conditions as those
conditions that relate to the achievement of a specified performance target (like, in
Broadcom's circumstances, the customer purchase requirements) . The
pronouncement reflects another consensus of the Emerging Issues Task Force that
would require Broadcom's sales discount to be recognized in the same period(s),
and in the same manner, as if it had used cash rebates as a sales discount instead of
using the warrants .
(b) Emerging Issues Task Force ("EITF") Topic D-90, "Grantor Balanc e
Sheet Presentation of Unvested, Forfeitable Equity Instruments Granted to
Nonemployee" ("EITF D-90"): This pronouncement announces an SEC staff
position that an issuer of a performance-based warrant should treat it as unissued
for accounting purposes until the issuer has received benefit and the warrant vests .
123
COUNT I
2
3
4
5
6
7
8
9
10
11
12
13
14
15
16
1 7
18
19
20
2 1
22
23
24
25
26
27
28
Against All Defendants For Violations of Section 10(b) of
The Exchange Act and Rule 10b-5 Promulgated Thereunde r
188. Lead Plaintiff repeats and realleges each of the allegations set forth in
the foregoing paragraphs .
189. Throughout the Class Period, Defendants individually and in concert ,
directly and indirectly, by the use and means of instrumentalities of interstate
commerce and/or of the mails, engaged and participated in a continuous course of
conduct to conceal adverse material information about the Company, including its
true financial results, revenue growth rates, future results and other financial
performance as specified herein . Defendants employed devices, schemes, and
artifices to defraud while in possession of material, adverse non-public information
and engaged in acts, practices, and a course of conduct that included the making of,
or participation in the making of, untrue and misleading statements of material facts
about Broadcom. Specifically, Defendants knew, or but for their reckless disregard
of the truth should have known, that the Company's reported financial results,
present and future revenue growth and other financial performance, throughout the
Class Period, as disseminated to the investing public, were materially overstated
and were not presented in accordance with GAAP .
190. Broadcom and the Individual Defendants, as the top executive officer s
of the Company, are liable as direct participants in the wrongs complained of
herein. Through their positions of control and authority as officers or directors, or
through their extensive stock ownership, the Individual Defendants were able to
and did control the content of the public statements disseminated by the Company.
With knowledge of the falsity and misleading nature of the statements contained
therein and in reckless disregard of the true financial results and present and future
growth rates of the Company, Defendants caused the heretofore complained of
124
public statements to contain misstatements and omissions of material facts a s
2 alleged herein .
191 . Defendants acted with scienter throughout the Class Period, in that the y
4
5
6
7
8
9
10
11
12
13
14
15
16
17
18
19
20
21
22
23
24
25
26
27
28
either had actual knowledge of the misrepresentations and/or omissions of material
facts set forth herein, or acted with reckless disregard for the truth in that they failed
to ascertain and to disclose the true facts, even though such facts were available to
them. The Individual Defendants constituted the senior management of the
Company, and were therefore directly responsible for the false and misleading
statements and/or omissions disseminated to the public through press releases, news
reports, analyst reports and SEC filings .
192. Defendants' misrepresentations were intentional or reckless and don e
for the purpose of enriching themselves at the expense of Lead Plaintiff and the
Class and to conceal the Company's true operating condition and present and futur e
revenue growth from the investing public .
193 . As a result of these deceptive practices and false and misleadin g
statements and omissions, the market price of Broadcom common stock was
artificially inflated throughout the Class Period. In ignorance of the false and
misleading nature of the representations and/or omissions described above and th e
deceptive and manipulative devices employed by Defendants, Lead Plaintiff and the
other members of the Class, in reliance on either the integrity of the market or
directly on the statements and reports of Defendants, purchased or otherwise
acquired Broadcom common stock or bought or sold options on Broadcom stock, at
artificially inflated prices and were damaged thereby .
194. Had Lead Plaintiff and the other members of the Class known of th e
material adverse information not disclosed by Defendants, or been aware of the
truth behind Defendants' material misstatements, they would not have purchased or
otherwise acquired Broadcom common stock, or bought or sold options on
Broadcom stock, at artificially inflated prices .
125
1
2
3
4
5
6
7
8
9
1 0
1 1
12
13
14
15
1 6
17
18
19
20
21
22
23
24
25
26
27
28
195 . By virtue of the foregoing, Defendants have violated § 10(b) of the
Exchange Act and Rule I Ob-5 promulgated thereunder .
COUNT II
Against the Individual Defendants For Violation of Section 20 of Th e
Exchange Act
196. Lead Plaintiff repeats and reallege each of the allegations set forth in
the foregoing paragraphs.
197 . Each of the Individual Defendants acted as a controlling person of th e
Company within the meaning of §20 of the Exchange Act during the Class Period .
Specifically, Nicholas had the power and authority to cause the Company to engage
in the wrongful conduct complained of herein by virtue of his positions a s
President, CEO and Co-Chairman of Broadcom . Ruehle, as Vice President and
CFO of Broadcom, was also in a position of power and authority to cause the
Company to engage in the wrongful acts complained of herein . Samueli, Vice
President of Research and Development, Chief Technical Officer and Co-Chairman
of Broadcom, was also in a position of power and authority to cause the Company
to engage in the wrongful acts complained of herein .
198 . By reason of the wrongful conduct alleged herein, the Individua l
Defendants are liable pursuant to §20(a) of the Exchange Act . As a direct and
proximate result of their wrongful conduct, Lead Plaintiff and the other members of
the Class suffered damages in connection with their purchases or other acquisitions
of Broadcom common stock, or purchases or sales of options on Broadcom stock,
during the Class Period.
NONAPPLICABILITY OF SAFE HARBO R
199 . The statutory safe harbor provided for forward-looking statement s
("FLS") does not apply to the false FLS pleaded . The safe harbor does not apply t o
Broadcom's allegedly false financial statements . The FLS pleaded herein were no t
specifically identified as "forward-looking statements" when made, it was not state d
126
1
2
3
4
5
6
7
8
9
10
11
12
13
14
1 5
16
17
18
19
20
21
22
23
24
25
26
27
28
that actual results "could differ materially from those projected," nor did
meaningful cautionary statements identifying important factors that could cause
actual results to differ materially from those in the FLS accompany those FLS .
None of the particular oral FLS were so identified as required . Defendants are
liable for the false FLS pleaded because, at the time each FLS was made, the
speaker knew the FLS was false and the FLS was made, authorized and/or
approved by an executive officer of Broadcom who knew that the FLS was false .
None of the historic or present-tense statements made by Defendants were
assumptions underlying or relating to any plan, projection or statement of future
economic performance, as they were not stated to be such assumptions underlying
or relating to any projection or statement of future economic performance when
made nor were any of the projections or forecasts made by Defendants expressly
related to or stated to be dependent on those historic or present-tense statements
when made.BASIS OF ALLEGATION S
200. Because the Private Securities Litigation Reform Act, §21D(c) of the
Exchange Act [15 U.S.C. §78u-4(c)], requires complaints to be pleaded i n
conformance with Federal Rule of Civil Procedure 11, Lead Plaintiff has allege d
the foregoing based upon the investigation of its counsel , which included a review
of Broadcom filings, securities analysts' reports and advisories about the Company ,
press releases issued by the Company and media reports about the Company,
witness interviews and consultations with experts and, pursuant to Rule 11(b)(3) ,
believes that after reasonable opportunity for discovery, substantial evidentiary
support will likely exist for the allegations set forth herein .
127
1
2
3
4
5
6
7
8
9
10
11
12
13
14
15
16
17
18
19
20
21
22
23
24
25
26
27
28
201 . Except as alleged in this complaint, the underlying information relatin g
to Defendants' misconduct and the particulars thereof are not available to Lea d
Plaintiff and the public, and lie exclusively within the possession and control o f
Defendants and insiders of Broadcom, thus preventing Lead Plaintiff from further
detailing Defendants' misconduct .
PRAYER FOR RELIEF
WHEREFORE, Lead Plaintiff, on behalf of itself and the other members o f
the Class, prays for judgment as follows :
1 . Declaring this action to be a proper class action maintainable pursuant t o
Rule 23 of the Federal Rules of Civil Procedure and certifying Lead Plaintiff to be a
proper Class representative ;
2 . Awarding Lead Plaintiff and the other members of the Clas s
compensatory damages against all Defendants, jointly and severally, for the
damages sustained as a result of the wrongs alleged in Counts I and II of the
Amended Complaint ;
3 . Awarding Lead Plaintiff and the other members of the Class their cost s
and expenses in this litigation, including reasonable attorneys' fees and experts' fees
and other costs and disbursements ;
4 . Granting extraordinary equitable and/or injunctive relief as permitted b y
law, equity and federal statutory provisions sued on hereunder, including attaching ,
impounding, imposing a constructive trust upon or otherwise restricting th e
128
proceeds of Defendants' trading activities or their other assets so as to assure tha t
2
3
4
5
6
7
9
10
11
1 2
13
14
15
16
1 7
18
19
20
21
22
23
24
25
26
27
28
Lead Plaintiff has an effective remedy ; and
5 . Awarding Lead Plaintiff and the other members of the Class such othe r
and further relief as the Court may deem just and proper .
JURY DEMAND
Lead Plaintiff demands a trial by jury .
DATED : April 1, 2002
en M. NelsonLAW OFFICES OFGRETCHEN M. NELSON707 Wilshire Boulevard, Suite 5000Los Angeles, California 90017Telephone: (213) 622-6469Facsimile: (213) 622-601 9
Samuel D. HeinsStacey L. MillsBryan L . CrawfordHEINS MILLS & OLSON, P .L.C.700 Northstar Eas t608 Second Avenue SouthMinneapolis , Minnesota 55402Telephone: (612) 338-4605Fax: (612) 338-4692
Plaintiffs ' Lead Counsel OnBehalf of Plaintiffs ' CounselListed on Schedule
129
SCHEDULE A
Deborah KurtzStuart KurtzSekuk Global EnterprisesJohn R. MurphyPond EquitiesDiane M. WeisburghKurt BlasserLillian BloomEdward FineLynn GreenBrad RosenfieldAntonio DiMaggioG. Richard Pearl DVD 2/23/95 Trustee,TrustJacob GoldL.A. MurphyAvi MandelDan MolinoYeshayahua Garfinkel
Herbert E . MilsteinAndrew N. FriedmanSteven J . Tol lMark S . WillisCohen, Milstein, Hausfeld & Toll500 West Tower1100 New York Avenue NWWashington, DC 20005(202) 408-4600fax: (202) 408-469 9
Blake M. HarperHulett Harper LLP550 West C StreetSuite 1770San Diego, CA 92101(619) 338-113 3fax: (619) 338-113 9
Mark C . GardyAbbey Gardy, LLP212 East 39 StreetNew York, NY 10016(212) 889-3700fax: (212) 684-5191
Additional Broadcom Plaintiffs
Zahid M. NawazRoslind WalankaEugene OlsonRudolf J . SkubellaStephen A. BlumenthalAllen V. ScheinerHoward PrinceAognus FloodJoseph FalzoneCharlotte HallDean E. HartHarry Hoffman
The 60223 Thomas SnevaJeffrey McDonaldMrs. Jeffrey McDonaldMae NaiditchCarol Fisher as Trustee for David FisherBarbara Jenson
Additional Plaintiffs' Counsel
Jeffrey S . AbrahamLaw Office of Jeffrey S. Abraham60 E. 42°d Street47th FloorNew York, NY 10165(212) 692-0555fax: (212) 692-058 8
Maxine S . GoldmanSteven R . BasserEdward M. GergosianBarrack Rodos & Bacine402 West Broadway, Suite 850San Diego, CA 92101(619) 230-0800fax: (619) 230-1874
Brian BarryBrian Barry Law Offices8424-A Santa Monica Blvd .Suite 184Los Angeles, CA 90069(323) 954-721 0fax: (323) 954-723 5
32545 130
Jacob A. GoldbergTodd Collin sBerger & Montague1622 Locust Street
Philadelphia, PA 19103-6365
(215) 875-3000fax: (215) 875-460 4
Michael G. LangeLeslie R . StemBerman, DeValerio & Pease, LLPOne Liberty Square8th FloorBoston, MA 02109(617) 542-8300fax: (617) 542-1194
Joseph J . Tabacco, Jr .Christopher T . HeffelfingerBerman, DeValerio & Pease, LLP425 California Street, Suite 2025San Francisco, CA 94104(415) 433-3200fax: (415) 433-638 2
Mel E. LifshitzJoseph R . Seidman, Jr.Michael S . EganBernstein , Liebhard & Lifshitz, LLP10 E. 40`h Street 22nd Floo rNew York, NY 10016-0201(212) 779-141 4fax: (212) 779-321 8
Anthony BologneseBolognese & AssociatesOne Penn Center
1617 JFK BoulevardSuite 650Philadelphia, PA 19103(215) 814-675 0fax : (215) 814-6764
Joshua M. LifshitzBull & Lifshitz246 West 380' StreetNew York, NY 10018(212) 869-944 9fax : (212) 869-5632
Paul J. GellerCauley, Geller, Bowman & CoatesOne Boca Place, Suite 421 A2255 Glades RoadBoca Raton, FL 33431(561) 750-3000fax : (561) 750-3364
Murray LewisTamara J . Driscol lCohen , Milstein , Hausfeld & Toll999 Third Avenue, Suite 3600Seattle, WA 98014(206) 521-0080fax: (206) 521-0166
Jacob SaboDekel-Sabo Law OfficesTwin Towers 1 33 Jabotinsky StreetRamat-Gan 5251 1P.O. Box 21119Tel-Aviv, Israel, 61210(011)972-36133310fax: (011)972-3613332 1
Michael D. DonovanDonovan Mi ller, LLC1608 Walnut Street, Suite 1400Philadelphia , PA 1910 3(215) 732-602 0fax: (215) 732-8060
William B . FedermanDreier Baritz & Federman120 N. Robinson, Suite 2720Oklahoma City, OK 73102(405) 235-156 0fax: (405) 239-2112
Kenneth A. ElanKenneth A . Elan Law Offices217 Broadway, Suite 404New York, NY 10007(212) 619-026 1fax: (212) 385-2707
Nadeem FaruqiFaruqi & Faruqi320 East 39`f' StreetNew York, NY 10016(212) 983-9330fax: (212) 983-933 1
32545 131
Brian M. FelgoiseBrian M . Felgoise Law Offices230 S. Broad Stree tSuite 404Philadelphia, PA 19102(215) 735-681 0fax: (215) 735-518 5
Howard D. FinkelsteinGregory A. HartlettJeffrey KrinskFinkelstein & Krinsk, LLP501 West Broadway, Suite 1250San Diego, CA 9210 1(619) 238-133 3fax: (619) 238-5425
Lionel Z. GlancyMichael M . GoldbergLaw Offices of Lionel Z. Glancy1801 Avenue of the Stars, Suite 311Los Angeles, CA 9006 7(310) 201-915 0fax: (310) 201-9160
Soloman B . CeraGwendolyn R. GiblinKaren C. KruseGold Bennett Cera & Sidener595 Market Street, Suite 2300San Fr ancisco , CA 94105-2835(415) 777-223 0fax: (415 ) 777-518 9
Jonathan PlasseChris Romanell i
Goodkind Labaton Rudoff& Sucharow100 Park Avenue, 12`h FloorNew York, NY 100 17-5563(212) 907-0700fax: (212) 818-0477
Dennis J . JohnsonJohnson & Perkinson1690 Williston Road
South Burlington, VT 05403(802) 862-0030
fax: (802) 862-0060
Gary S. Graifman
Kantrowitz & Goldhamer747 Chestnut Ridge RoadChestnut Ridge, NY 10977(845) 356-2570fax: (845) 356-4335
Laurence D. KingKaplan Kilsheimer & Fox LLP100 Pine Street, 26th Floo r
San Francisco, CA 94111(415) 677-123 8fax: (415) 677-123 3
Jonathan K. LevineFredric S . FoxKaplan , Kilsheimer & Fox LLP805 Third Avenue, 22nd FloorNew York, NY 1002 2(212) 687-198 0fax: (212) 687-771 4
Ira M. PressKirby McInerney & Squire830 Third Avenue, 10th FloorNew York, NY 1002 2(212) 371-6600fax: (212) 751-2540
Richard M. HeimannMelanie M . PiechJames M. FinbergJoy A. KruseErnest R. MomsLieff Cabraser Heimann& Bernstein LLP
Embarcadero Center West275 Battery Street, 30th FloorSan Francisco, CA 94111-3339(415) 956-1000fax: (415) 956-100 8
Michael KaneMager & WhiteThe Pavilion
261 Old York Road, Suite 810Jenkintown, PA 19046(215) 481-0273fax: (215) 481-027 1
32545 132
William S . LerachDarren J . RobbinsMilberg Weiss Bershad Hynes& Lerach LLP600 West Broadway1800 One America PlazaSan Diego, CA 92101(619) 231-105 8fax: (619) 231-7423
Jeff S. WestermanJonathan E. BeharMilberg Weiss Bershad Hynes& Lerach LLP
355 S . Grand Avenue, Suite 4170Los Angeles, CA 90071-3172(213) 617-9007fax: (213) 617-9187Carol V. GildenMuch Shelist Freed Dennenberg Ament & Elger2.00 N. LaSalle, Suite 210 0Chicago, IL 60601-1095(312) 346-3100fax: (312) 621-1484
Bruce G. MurphyLaw Offices of Bruce G. Murphy265 Llwyds LaneVero Beach, FL 32963(561) 231-4202fax: (561) 231-404 2
Charles J . PivenLaw Offices of Charles J . PivenWorld Trade Center-Baltimore401 East Pratt Suite 2525Baltimore, MD 21202(410) 332-0030fax: (410) 685-1300
Stanley M. GrossmanAndrew G. TolanMarc I. Gros sPomerantz Haudek Block Grossman& Gross
1.00 Park Avenue, 26th FloorNew York, NY 1001 7(212) 661-110 0f'ax: (212) 661-8665
Marvin L. FrankRabin & Peckel275 Madison Avenue, 34th FloorNew York, NY 1001 6(212) 682-181 8fax: (212) 682-1892
Barbara A. PodellSavett Frutkin Podell & Ryan, P .C.Constitution PlaceIn Society Hill, Suite 700325 Chestnut StreetPhiladelphia, PA 19106(215) 923-5400fax: (215) 923-935 3
Jeffery S . NobelPatrick A. KlingmanSchatz & Nobel330 Main StreetHartford, CT 06106-1851(860) 493-6292fax: (860) 493-629 0
Marc A. TopazSchiffrin, Craig & Barroway LLP3 Bala Plaza East, Suite 40 0Bala Cynwyd, PA 19004(610) 667-7706fax: (610) 667-7056
David R . ScottScott & Scott108 Norwich AvenueP.O. Box 192Colchester, CT 06415(860) 537-381 8fax: (860) 537-4432
David R . BuchananAmy AlbertSeeger WeissOne William StreetNew York, NY 10004(212) 584-0700fax: (212) 584-079 9
James A. CaputoSpector , Roseman & Kodroff600 West Broadway, Suite 1800San Diego, CA 9210 1(619) 338-451 4
32545 133
fax: (619) 239-0547
Jules BrodyAaron Brody
Stull, Stull & Brody6 East 45`h StreetNew York, NY 10017(212) 687-7230fax: (212) 490-2022
Michael D. BraunStu ll, Stull & Brody10940 Wilshire Blvd.Suite 230 0Los Angeles, CA 90024(310) 209-246 8fax: (310) 209-208 7
Robert C . SusserRobert C. Susser P.C.6 East 43`d Street, #19New York, NY 10017(212) 808-029 8fax: (212) 949-0966
Faul J . ScarlatoWeinstein , Kitchenoff, Scarlato& Goldman, LTD .1608 Walnut Street, Suite 1400Philadelphia, PA 1910 3(215) 545-7200fax: (215) 545-6535
Kevin J. YourmanVahn AlexanderJennifer WilliamsWeiss & Yourman10940 Wilshire Blvd, 24'x' FloorLos Angeles, CA 90024(310) 208-280 0fax: (310) 209-2348
Fred T. IsquithWolf Haldenstein Adler Freeman& Herz LLP
270 Madison AvenueNew York, NY 10016(212) 545-4600fax: (212) 545-4653
Francis M. GregorekBetsy C . Manifold
Francis A. Bottini, Jr .Wolf Haldenstein Adler Freeman& Herz LLP
Symphony Towers750 B Street, Suite 2770San Diego, CA 92101(619) 239-4599
fax: (619) 234-4599
Alfred G. YatesAlfred G. Yates & Associates519 Allegheny Bldg.529 Forbes Ave .Pittsburgh, PA 15219(412) 391-5164fax: (412) 471-103 3
32545 134
