Opinion ID: 214714
Heading Depth: 1
Heading Rank: 10

Heading: Involvement in Broadcom's 2003 Corrective Reforms

Text: The Complaint alleges that EY had direct knowledge of the irregularities in Broadcom's option granting process due to EY's participation in corrective reforms undertaken in 2003 to ensure future option grants were treated properly. In June 2003, the Broadcom board of directors significantly strengthened [its] options granting practices and put into place rigorous processes to prevent and detect any future instances of improper accounting for equity awards. Press Release, Broadcom Corp., Broadcom Completes Restatement of Financial Statements (Jan. 23, 2007). This announcement was made by the Broadcom CEO in January 2007 in connection with the Restatement of Broadcom's financial statements. The Restatement declared the board made significant corrective changes to its options granting and documenting processes. Plaintiffs allege that EY, as Broadcom's auditor, presided over or participated in the 2003 reforms and, by doing so, EY had knowledge that prior option grants caused previously reported financials to be false and could not be relied upon. Despite this knowledge, EY did not investigate the prior grants and did not encourage Broadcom to submit to a restatement of its financial statements. Instead, EY continued to issue unqualified audit opinions, including the 2005 Opinion that validated several earlier years in which the improperly accounted option grants would have materially impacted Broadcom's financial results. Not until the 2007 Restatement did the 2003 corrective reforms become public knowledge. EY, citing Zucco, claims the 2003 corrective reforms cannot be indicative of scienter because Broadcom was simply making changes based on the 2002 congressional mandate of the Sarbanes Oxley Act (SOX). Not so. First, EY participated in, perhaps presided over, the 2003 corrective reforms. Second, these changes were not simply part of Broadcom's SOX compliance because Broadcom's 2003 proxy statement shows the SOX reforms were completed before the implementation of the corrective reforms described in the Complaint. Third, Broadcom's description of the 2003 corrective reforms makes it clear the changes were made specifically to address improper option procedures. Indeed, all option grants after the 2003 reforms were accounted for properly. Fourth, and finally, despite these reforms taking place in 2003, EY apparently took no action to revisit the audits of earlier grants or to inform creditors, stockholders, or the investing public as EY was required to do. See e.g., United States v. Arthur Young & Co., 465 U.S. at 817-18, 104 S.Ct. 1495. Here, the allegations strongly suggest EY knew of and participated in the corrective reforms to address improper stock option grants, but made no communication and took no action until Broadcom announced its Restatement several years later. This scenario survives a motion to dismiss.