SANTA ANA, California – A federal judge yesterday dismissed fraud and conspiracy charges against Broadcom Corp co-founder Henry T Nicholas III and former Chief Financial Officer William Ruehle in a stock-option backdating case because of prosecutorial misconduct.

US District Judge Cormac J Carney also asked the Government to show cause why a separate drug indictment against Nicholas should not also be thrown out.

The stunning move came after Carney last week vacated a guilty plea by Broadcom co-founder Henry Samueli in the same case. Carney found that prosecutors tried to prevent three key defence witnesses from testifying, improperly contacted attorneys for defence witnesses and leaked information about grand jury proceedings to the media.

Ruehle had pleaded not guilty to 14 counts of fraud and conspiracy in the high-profile investigation into stock option backdating at the Irvine-based chip-maker, one of the most successful semiconductor developers in the world.

Backdating involves retroactively setting a stock option’s exercise price to a low point in the stock’s value, boosting profits when the shares are sold. It is legal when properly accounted for, but if not properly disclosed it can allow companies to overstate profits and underpay taxes while diminishing shareholder value.

Broadcom was ultimately forced to write down US$2.2 billion in profits after the backdating was uncovered. The company collected nearly US$5 billion in revenues last year.

Ruehle’s attorneys alleged that lead prosecutor Andrew Stolper leaked information about Samueli’s 2007 grand jury appearance to reporters and contacted the attorneys of two other witnesses to try to influence their testimony.

One of those was former Broadcom general counsel David Dull, who was granted immunity to testify in Ruehle’s case.

In a hearing away from the jury last week, Stolper acknowledged leaking information to the press and called it the “stupidest thing I have done in my career”.

He has declined to comment outside court.

Carney tossed Samueli’s guilty plea last week and dismissed a charge that the 55-year-old billionaire owner of the NHL’s Anaheim Ducks lied to Securities and Exchange Commission investigators. The judge determined that Samueli did not commit the offence after the co-founder testified for two days for Ruehle’s defence under a grant of immunity.

Nicholas was set for trial next year on two separate indictments, one alleging fraud and conspiracy in the backdating case, and the other involving federal drug charges.

Samueli and Nicholas started Broadcom in 1991 and took it public in 1998. The company grew to 7,000 employees worldwide and is a leading manufacturer for the chips used in everything from cable boxes to cell phones.