* Judge orders govt. to show cause for Nicholas drug trial
* Government considering its options
* Judge discourages SEC from refiling its case (Recasts first paragraph, adds comments from judge, Nicholas)
By Gina Keating
LOS ANGELES, Dec 15 (Reuters) - A U.S. judge tossed out criminal and civil charges against Broadcom Corp’s BRCM.O co-founder Henry Nicholas III and former Chief Financial Officer William Ruehle on Tuesday and told the government not to bother trying to reinstate the stock options backdating-related cases because of misconduct by prosecutors.
U.S. District Judge Cormac Carney acquitted Ruehle, who was in the midst of trial in Santa Ana, California, on backdating-related charges, and dismissed with prejudice the indictment against Nicholas, whose trial was set for 2010.
The judge said he intended that neither man should be retried because the main witnesses in the cases had been compromised by government tactics.
“The cumulative effect of that misconduct has distorted the truth-finding process and compromised the integrity of the trial,” Carney said at the hearing.
The judge gave the U.S. Securities and Exchange Commission 30 days to refile its civil backdating action against the two men but discouraged the agency from proceeding with the case.
He also ordered prosecutors to explain at a Feb. 2 hearing why they should be allowed to proceed with drug-related charges against Nicholas, and warned that they would face further evidence of misconduct in that case, set for trial next year.
Stock option backdating at Irvine-based chipmaker Broadcom led to a $2.2 billion restatement in 2007. Ruehle and Nicholas were accused of hiding the compensation expenses and profiting from backdating proceeds, charges that both denied.
Ruehle’s attorney, Richard Marmaro, of Skadden, Arps, Slate, Meagher & Flom, said his client “is a good man who never should have been charged.”
Nicholas said in a statement that he was “deeply grateful” for the ruling.
U.S. Attorney’s Office spokesman Thom Mrozek said the government would review the ruling and consider its options.
The ruling came as the case against Ruehle, which began in October, was headed to a jury. He and Nicholas each faced life in prison if convicted.
Marmaro had argued that the indictment should be dismissed because of numerous instances of prosecutor misconduct amounting to bullying and threatening witnesses, and due to the government’s inability to show that Ruehle committed a crime.
The government acknowledged that Assistant U.S. Attorney Andrew Stolper had acted inappropriately by leaking information about the Broadcom investigation to the media and in talks with a witness’s lawyer, but argued that dismissing the case was not warranted in light of actions the judge took during the trial to protect Ruehle’s rights.
Carney came down hard on Stolper, finding that he conducted a “campaign of intimidation” to force Broadcom co-founder Henry Samueli and human resources manager Nancy Tullos to plead guilty to crimes they did not commit and left former General Counsel David Dull “hanging in the wind” by failing to either charge or clear him for almost two years.
Carney last week set aside Samueli’s guilty plea.
The judge also questioned whether the government ever had proof of crimes at Broadcom, which engaged in “the exact same” accounting practices as Apple Inc (AAPL.O) and Microsoft Corp(MSFT.O) by backdating stock options.
Stanford Law School professor Robert Weisberg said the era of stock options backdating prosecutions, which touched more than 170 U.S. companies but led to no convictions of top executives, should caution prosecutors probing possible criminal activity during the recession.
“In the atmosphere of public concern of corruption (in the post Enron era), stock options backdating was attractive to prosecutors because they wanted to score a big victory but they didn’t think it through,” Weisberg said. “They should resist pressure to satisfy the public interest (by) scapegoating.”
The case is the second major stock options backdating trial to be hit by allegations of prosecutor abuses.
In August, a federal appeals court ordered a new trial for former Brocade Communications Corp BRCD.O CEO Gregory Reyes over prosecutorial abuses. Reyes is the only other CEO to face a backdating-related criminal trial.
The case is USA v. Ruehle, Case No. 08-00139, U.S. District Court for the Central District of California. (Reporting by Gina Keating; Editing by Richard Chang)