Ruehle Tells Story of Backdated Options, Prosecutorial Misconduct

Ruehle Tells Story of Backdated Options, Prosecutorial Misconduct

10 Mins
November 12, 2012

BOOK REVIEW: William J. Ruehle, Mr. Ruehle, You Are a Free Man —A Broadcom Saga: My Fight for Justice. North Charleston, SC: CreateSpace, 2012. 270 pp. $15.99

Sir Thomas More:
You threaten like a dockside bully.
Thomas Cromwell:
How should I threaten?

Sir Thomas: Like a minister of state, with justice.
Cromwell: Justice is what you're threatened with.
Sir Thomas: Then I am not threatened.

                           Robert Bolt, A Man for All Seasons

And so Americans like to believe. When they hear of some businessman denounced by the media and indicted by a U.S. Attorney, they are likely to say to themselves: “Well, there certainly seems to be something to it. What the media says about this fellow’s behavior seems extremely reprehensible, and he surely would not have been indicted unless there was very good evidence for the illegality of those actions.”

Unfortunately, as I have learned during the past seven years, such a view is completely false when it comes to the prosecution of corporate executives. Left-wing journalists today have many incentives to launch rich-hunts against nationally prominent businessmen, regardless of guilt: such frenzies bring journalists raises, praises, prizes, and book contracts. Likewise, cynical government prosecutors have many incentives to pursue media-defamed businessmen, also regardless of guilt: convictions bring prosecutors journalistic adulation, departmental promotions, lavish private-firm job offers, and even political power. As a result, journalism today is populated by innumerable muckrakers, and the Justice Department by hundreds of “dockside bullies.”

Bill Ruehle’s bad luck was to discover this first-hand. His good luck was that—having lost his job, three years of his life, and millions of dollars—he was ultimately vindicated. This book tells the tale of his ordeal.


William J. Ruehle was the chief financial officer (CFO) of Broadcom Communications, an Internet company founded in 1991 by “a quiet electronics engineering professor from UCLA (Henry Samueli) and his not-so-quiet student (Henry Nicholas).” Broadcom first turned a profit in 1994: revenues were $3.6 million. Twelve years later, in 2006, revenues were $3.7 billion—a thousand-fold increase.

William and Jill Ruehle at their home in California

In 1997, Bill Ruehle was a 55-year-old Silicon Valley CFO and thinking of retiring. But he “wanted to see if [he] could help guide another company from early stage to industry leader.” Broadcom met all the criteria he had set for his joining a new company, and although the job of CFO would entail his commuting from Silicon Valley to Orange County, he signed on. The pay was tiny, but a generous option grant offered the promise of great wealth if the company succeeded. The burgeoning company was hiring most of its employees on the same terms: few dollars but lots of options. Inevitably, questions of equity arose. “Two individuals could start a week apart and each have their options priced at their respective start dates. Because the stock was so volatile, the strike price could differ by $25 to $30 or more—in either direction.”

Ruehle does not explain as clearly as a reader might wish how this situation drove Broadcom policies regarding the use of options as compensation. But as I explained in Rich-Hunt , many Silicon Valley companies (some have said “most”) decided that all employees hired within a quarter should be given options with an exercise price set, by means of hindsight, at the lowest stock price for that quarter. Whether that was the case at Broadcom, I cannot be certain. But it seems likely.


Accounting professor Erik Lie

In 2005, the practice of issuing options using hindsight was the subject of a journalistic anti-business frenzy. Such retrospective pricing of options was termed “backdating” by the media, a term that Ruehle says he had never heard until the media adopted it. The fundamental insinuation underlying the media frenzy was that people paid in options when they joined a company should begin with no paper profits, just as people who buy a share on the market must start without any paper profit. Backdating did provide employees with paper profits, and that discrepancy between the two groups was denounced as fundamentally unfair, an advantage provided to insiders to slake their insatiable greed. (Of course, even to assert the claim that employees actually had paper profits—that is, unrealized profits—journalists had to ignore the fact that options generally have vesting periods.)

The frenzy over backdated options began in November 2005. University of Iowa accounting professor Erik Lie had discovered in 2004 that the consistent profitableness of executive options demonstrated that they were not granted on random dates: the odds against achieving such consistent profits randomly would have been millions-to-one—assuming that each option’s exercise price equaled the stock’s price on the day the option was issued. Working with another accounting professor, Randall Heron, Lie then demonstrated that once executive options could no longer be granted using hindsight, following a change in regulations, their consistent profitableness disappeared. Conclusion: the profitableness had resulted from backdating.

Lie and Heron did not know whether backdating was legal (it was). Their concern was that the process seemed “unfair” and that the profits of backdating thus seemed “unearned.” Said Lie’s father to BusinessWeek: “Erik doesn't like that people have gotten money they didn't deserve.” Lie and Heron immediately alerted the SEC to their findings, and the commission did begin investigating a few instances of the practice. Heron, however, was apparently dissatisfied with the pace of the SEC’s work, and, after reading a minor story about backdating in the November 3, 2005, Wall Street Journal, he emailed his and Lie’s research to Journal reporter Mark Maremont. One week later, Maremont published a more comprehensive article on backdating and the frenzy took off, fueled by charges of greed and unfairness. In 2007, the Journal’s coverage of the backdating issue would win its reporters a Pulitzer Prize for Public Service.

"Because the stock was so volatile, the strike price could differ by $25 to $30 or more—in either direction."

-William Ruehle

The frenzy over backdating did not sweep up Bill Ruehle until rather late in the game. The WSJ story that defamed him and his Broadcom colleagues was not printed until February 16, 2007. By that time the Journal’s reporters had already published an overview article of the whole backdating frenzy and had packaged their 2006 stories into a Pulitzer Prize submission. But as Broadcom was a major company, and as both of its famous co-founders were apparently going to be targeted, the case was still worth a page one story.

Like so many recent muckraking stories, this one opened “dramatically,” with an email taken out of all context. That, of course, was exactly the technique by which Eliot Spitzer had distorted the actions of his victims, again and again, to the delight of the press. And that was the technique used most famously by prosecutors to distort the behavior of Frank Quattrone and make it seem criminal. Surely, we should have learned our lesson. Editors and readers and judges and juries need to say about any email taken out of its full context what archeologists say about an artifact taken out of its full context: It tells us nothing.

Here are the opening three paragraphs of the Journal’s February 16 story on Broadcom, written by James Bandler and Charles Forelle:

On Jan. 4, 2002, the chief financial officer of Broadcom Corp. tapped out an email about stock options to his chief executive and others.

“I VERY strongly recommend that these options be priced as of December 24,” he wrote.

They were, and that was fortunate for recipients. Broadcom’s share price rose 23% between the two dates. The pretense that the options had been granted on the earlier date made them extra valuable.

That’s it. Immediately following the three paragraphs quoted above, the authors repeated the nonsensical allegation that such backdating “violated the rationale of stock options.” But how could the reporters know that? There is absolutely nothing in the rest of the 2,000-word article that illuminates either the context of Ruehle’s email or the circumstances under which the options had been granted.

In an appendix to his book, Ruehle provides a must-read model for how businessmen and their defenders should deal with the anti-business frenzies of journalists and bullying prosecutors. He begins by explaining thoroughly why the quoted email was utterly innocuous, using the sworn testimony of the top people at Broadcom, including one board director who testified for the prosecution. He then reprints the whole Journal article, so that there can be no question of selective quotation. The result is that readers can see for themselves the naked bias of the Journal’s reporters.

The trouble, of course, is timing. The Journal article was published in February 2007. Ruehle’s response was published in August 2012. Once the bullies start to move in, the usual legal advice is to say as little as possible. Perhaps businessmen should reconsider that strategy of silence. It does not seem to do much good. Bill Ruehle was indicted for securities fraud on June 4, 2008, two days before his sixty-sixth birthday. Henry Nicholas was also indicted for securities fraud and on various drug charges as well.


Oddly, Ruehle’s book seems never to explain exactly how a noncriminal failure to comply with the SEC’s weird accounting regulation related to options (the regulation called APB 25) could be turned into a criminal indictment. He comes closest by quoting from the indictment’s charge that he engaged in a scheme to “disguise, conceal, understate, and mischaracterize compensation expenses.” But who was his “scheme” supposed to have defrauded and how? That is obscure in Ruehle’s book, although he speaks of “shareholders” as supposed victims. In fact, as readers of my monograph Rich-Hunt will know, the trick was to say that by accounting for the options as if they had been issued earlier than they were, Broadcom was lowering noncash “expenses,” thus making company earnings seem larger than they were—and by doing that, it deceived the investing public with regard to the desirability of investing in the company, even though such noncash “expenses” did not involve any money leaving the company’s coffers.

The SEC determined in September 2006 that hundreds of companies had misinterpreted APB 25 during the 1990s Internet boom.

Now, some executives had an obvious rejoinder to that charge. As I related in Rich-Hunt: The Backdated Options Frenzy and the Ordeal of Greg Reyes , Brocade CEO Reyes—an executive with a sales and marketing background—had very reasonably asserted at his 2007 trial that he had been relying upon his top-notch CFO to make sure that all such SEC regulations regarding accounting were followed when financial statements were filed. Reyes’s prosecutors then blatantly lied to the jury, saying Brocade’s finance department knew nothing about the backdating scheme, and so Reyes was convicted. But Bill Ruehle could not even make Reyes’s claim. After all, he was a top-notch CFO. So, what was his excuse for not following APB 25?

Here is the first of many places where Ruehle’s book shines. It does a far better job than any other account I have seen (including my own) in explaining just how truly obscure APB 25 was. The SEC determined in September 2006 (well after the frenzy had begun) that hundreds of companies had misinterpreted APB 25 during the 1990s Internet boom. But before the SEC made its determination, hundreds of finance executives had reasonably thought that they were in compliance with APB 25. This is the background reporting that the Journal’s Pulitzer Prize–winning reporters never did. Their stories invariably made it seem that the accounting procedures dictated by APB 25 were obvious and simple. In fact, the procedures were anything but obvious and simple. For that distortion alone, the Journal’s reporters should have been denied the Pulitzer Prize, and perhaps fired.

Nor were the Journal reporters alone in their misrepresentations of options accounting. The failure of American journalism to elucidate the basic nature of the backdating issue is strikingly underlined by a comment that one of Ruehle’s prosecutors made. While questioning a former Broadcom controller, merely for the purpose of introducing some factual matter into the record, the prosecutor tried to get the controller to acknowledge that if an option were backdated to a below-market price then the company had to “kick in” the difference. The startled controller, of course, answered with a perplexed “No.” But the very question suggests that at least some prosecutors, including Ruehle’s, did not at all grasp the financial issues in backdating cases—despite which, they tried to send Bill Ruehle and others to prison.


Ruehle’s trial began in October 2009, before District Judge Cormac J. Carney. It is worth mentioning (although Ruehle does not) that his lawyer, Richard Marmaro, had been Greg Reyes’s lawyer in an earlier backdating case—and Reyes had lost in August 2007. However, it is also worth mentioning (although Ruehle does not) that in August 2009 Greg Reyes’s conviction had been thrown out by a panel of the Ninth Circuit Court of Appeals, on the grounds of prosecutorial misconduct. Under the circumstances, it is not surprising that Ruehle says: “Beginning very early in the case, the defense team was compiling evidence of misbehavior by the prosecutors.”

As in the Greg Reyes case, one sees—again and again and again—how prosecutors distort facts, suppress truths, and mislead jurors in order to send America’s most productive men to prison.

It was surely obvious to Marmaro, having been through the Reyes case, that the whole backdated-options business was nothing but a frenzy and a rich-hunt. Marmaro had demonstrated in court that backdating as such did not deprive investors of the corporate information they needed to make their investment decisions. Thus, it was obvious that backdating alone should never have become the basis for a charge of fraud. But once the journalistic frenzy got underway, a few prosecutors blinded themselves to that evident fact and did bring charges of fraud against backdaters—destroying those people’s lives. Just by bringing such charges, those prosecutors had abused their power and had revealed their own lack of character. That they would then go on to perpetrate prosecutorial misconduct in the courtroom was, therefore, not unlikely.

If that was the reasoning that led Marmaro to begin an early watch for misconduct, it proved to be sound. And it is Marmaro’s continuing focus on prosecutorial misconduct that raises Ruehle’s book to the level of a horror story. As in the Greg Reyes case, one sees—again and again and again—how prosecutors distort facts, suppress truths, and mislead jurors in order to send America’s most productive men to prison.

A leading figure in the story is the prosecution’s star witness, Nancy Tullos, someone with whom Ruehle had worked closely and so someone whose testimony was a disappointment to him—until he learned what prosecutorial harassment she had been subjected to. Initially, she had rebuffed the government’s attempts to interview her. But she had taken a new job, her “dream job,” and the prosecutor in Ruehle’s case had called up the general counsel of her new company—to ask what their policy was with regard to employees who refused to cooperate with a government investigation. Tullos resigned from her dream job and pled guilty to an “obstruction of justice” felony, which left her facing a five-year prison term. Absurdly enough, the basis for Tullos’s “obstruction” plea was asking a co-worker to delete an email regarding Broadcom’s options—seven years before there was any investigation of Broadcom’s options to obstruct. After pleading guilty to obstruction of justice, and having been told that she would get probation if she cooperated, Tullos entered into twenty-six “interviews” with government prosecutors, in order to prepare her testimony. Marmaro, patiently but ineluctably, got Tullos to concede that her testimony was simply an artifact of the prosecution’s influence.

Broadcom co-founder Henry Samueli, a Silicon Valley legend, refused to testify for the prosecution and had strong evidence that he could offer Ruehle. But he, too, had been bludgeoned into pleading guilty to a minor felony and so refused to testify for the defense. It seems that, in testimony before the SEC, Samueli had been asked more than 1300 questions. One was whether he had been involved in granting options to executives. Since he was not part of the compensation committee for executives, he had answered no. Just seventeen lines of testimony later, he realized that there was a sense in which he had been “involved” in such option grants, because he did offer recommendations to the relevant board. And there was nothing wrong with his doing that. So he corrected himself. But on that basis, prosecutors threatened him with 300 years in prison unless he pleaded guilty to a felony, which he did, in return for probation and a $12 million dollar financial penalty. Late in 2008, however, Judge Carney had rejected the agreement, on the grounds that Samueli was not cooperating with the government and also on the grounds that the penalty, relative to Samueli’s multi-billion-dollar wealth, gave the impression that justice was for sale. Samueli nevertheless decided to stand his ground, neither withdrawing his plea nor cooperating with the government. But he did refuse to testify for Ruehle, fearing that the government would come back to wreak its vengeance if he crossed them.

Finally, though, the prosecutors went too far, and Ruehle presents this part of the story with all the drama and growing tension of a novel. Broadcom General Counsel David Dull was the fourth executive charged in a civil suit by the SEC, but he had not been criminally indicted by the prosecutor. That left him “on ice.” The obvious threat was that he must not testify on behalf of Bill Ruehle or Henry Nicholas. And indeed he said that he would refuse to testify by asserting his right not to incriminate himself. Surprisingly, though, despite the prosecution’s objections, Judge Carney granted Dull (and Samueli) immunity to testify. Such grants of immunity are rare, Ruehle explains, because a judge who grants immunity despite the prosecution’s objections is essentially making a prosecutorial decision: that the person immunized shall not be prosecuted. Evidently, Judge Carney was willing to assume that extraordinary burden because he was no longer confident that the prosecution wanted to get at the truth.

In the face of the Judge Carney’s action, the chief prosecutor did something absolutely outrageous. He called up Dull’s lawyers and said two things. First, he said, immunity be damned, he believed that he could prosecute Dull for perjury if he testified as he had before the SEC. And, second, he said that if Dull would just go along with the testimony of a certain earlier prosecution witness, the government would give him a “soft cross,” that is, a gentle cross-examination. Although the call was not recorded, both of Dull’s attorneys found the call so incredible that they immediately made notes on it. And the next day, before court opened, they presented their notes to Judge Carney, who was appalled. The incident did not immediately result in Ruehle’s case’s being dismissed, but it furthered the judge’s sense that the prosecution was more than willing to thwart justice in order to win. And it resulted in two remarkable decisions by Judge Carney. He allowed David Dull’s lawyer to testify before the jury about the prosecution’s attempt to pressure him. And following Samueli's (immunized) testimony, Carney called Samueli to the bench and set aside his guilty plea.

On December 10, 2008, Judge Carney dismissed the jury for a week. When they returned, he told them, they would hear closing arguments and receive his instructions. In the meantime, however, the defense filed two standard motions for dismissal: the first said that the prosecution had not proved its case; the second said that the prosecution has engaged in misconduct. The first, Ruehle explains, is stronger, because it seeks a complete dismissal of the charges. However, it is also much harder to prove, because it entails showing that, on the evidence presented by the prosecution, no rational juror could vote to convict. A request for dismissal on the grounds of prosecutorial misconduct, though easier to win, allows the government to bring the same charges again. And of course that is just what happened in the Greg Reyes case. A Ninth Circuit panel had found flagrant and intentional prosecutorial misconduct in the Reyes case, specifically, the government’s lie to the jury that Brocade’s financial department knew nothing about the company’s backdating. But the government brought the case against Reyes again, won again, and sent Reyes to prison.

On December 15, Judge Carney convened all the associated parties to hear his decisions. At that time, he dismissed Bill Ruehle’s case on the grounds of both prosecutorial misconduct and insufficient evidence. He dismissed the backdating charges against Henry Nicholas. He dismissed the SEC complaints against Henry Nicholas, Henry Samueli, David Dull, and Ruehle. He voided the guilty plea of Nancy Tullos (although he ruled that Tullos’s entire testimony was unreliable and had to be stricken from the record). And he set down such difficult conditions for the prosecution of Henry Nicholas on the drug charges that the prosecution had thrown into his case that those, too, were soon dropped.

Finally, he quoted the same 1935 words of Justice Sutherland that federal district Judge Lewis Kaplan had quoted when dismissing a case against KPMG in 2007: “The United States Attorney is the representative, not of an ordinary party to a controversy, but of a sovereignty whose obligation to govern impartially is as compelling as its obligation to govern at all, and whose interest, therefore, in a criminal prosecution is not that it shall win a case, but that justice shall be done.”

Fortunately, Bill Ruehle’s relief at his vindication and his admiration for Judge Carney’s pursuit of justice does not keep him from laying out in straight-forward and highly instructive language the many motives that prosecutors have for seeking to win cases rather than seeing that justice is done. There is no indication that Ruehle has read James Buchanan and the Public Choice theorists. But his observations accord with their speculations precisely.


Bill Ruehle’s book is deeply inspiring. His own moral certainty and stamina are inspiring. The brilliance and tenacity of Rich Marmaro and his legal team are inspiring. Above all, Judge Carney’s passion for truth and justice are inspiring. Obviously, Bill Ruehle has attempted to capture some of that inspiration in his title: Mr. Ruehle, You Are a Free Man.

But his title is false.

I can understand how Bill Ruehle’s heart must have leapt when Judge Carney spoke the words, “Mr. Ruehle, you are a free man.” I can understand that those words must have sounded to him like words of grace and salvation. And so I can understand why he has taken those words for his title.

But a country in which a prosecutor calls up a defense witness’s attorney and tries to bully the witness out of telling the plain truth is not a free country. A country whose prosecutors get a woman fired from her job and then “interview” her twenty-six times while threatening her with five years in prison, all in order to get the twisted testimony they want, is not a free country. A country whose prosecutors threaten one of the nation’s greatest producers with 300 years in prison for an utterly minor mis-statement, unless he bends to their will, is not a free country.

Bill Ruehle’s title reminds me of a cartoon that was published many years ago, during the days of the Cold War. It showed a city with a huge and looming wall—presumably East Berlin. On the walls of the city, one saw barbed wire and concertina wire and broken glass and machine-gun posts. And one saw, off in a small corner of the city, a tiny jail cell, with a guard opening its door. As the prisoner walked out of his little cell, the guard was saying to him: “We’re setting you free.”

Neither Bill Ruehle, nor any us, will be free men until we live in a free country.