Ernst & Young must face class action over Broadcom’s option backdating

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A federal appeals court Thursday reinstated a class-action lawsuit filed by Broadcom Corp. investors against Ernst & Young, saying the auditors should have known about an option-backdating scheme at the Irvine tech company.

A lower-court judge had dismissed the case against Ernst & Young after concluding the plaintiffs hadn’t shown that the auditors knew that the value of Broadcom’s stock was probably inflated by the company’s manipulation of its financial statements.

Thursday’s ruling by the U.S. 9th Circuit Court of Appeals in San Francisco reversed that dismissal and scolded Ernst & Young for not acting to stop the $2.2-billion backdating scheme.

Ernst & Young ‘apparently accepted management at its word, never received requested documentation and issued an unqualified opinion on the accuracy of Broadcom’s financial statements,’ the 9th Circuit panel ruled in overturning the lawsuit’s dismissal by U.S. District Judge Manuel L. Real in Los Angeles.

Ernst & Young’s audit ‘amounted to no audit at all,’ the appeals court said.

A spokesman for Ernst & Young declined to comment on the ruling, saying the firm was still reviewing it.

The appeals court action sends the case back to Real for trial, barring other successful legal challenges by the defendants.

Broadcom’s $2.2-billion restatement of financial results in early 2007 was the largest resulting from a wave of stock-option scandals at about 200 U.S. companies.

-- Carol J. Williams