RealTime IT News

Former Brocade Execs Charged in Stock Scandal

UPDATED: Gregory Reyes, the former CEO of Brocade Communications Systems, along with the former vice president of human resources at the computer gear manufacturer, face federal securities fraud in the widening stock options scandal.

Reyes, 48, and Stephanie Jensen could potentially receive 20 years in prison, along with $5 million in fines for granting backdated stock options to employees between 2000 and 2004, according to the Securities and Exchange Commission (SEC) and the U.S. Attorney's Office for the Northern District of California.

Brocade faces both criminal and civil charges. The former company officials altered records and backdated Board of Directors meeting minutes, U.S. Attorney Kevin Ryan said in a statement.

Reyes and Jensen were issued a summons to appear in the San Francisco court of Magistrate Judge Joseph Spero.

Former Brocade CFO Antonio Canova was also charged with knowing of the alleged fraud when he joined the company and failing to inform auditors.

According to the SEC, Reyes and Jensen defrauded investors millions of dollars by backdating documents to indicate stocks options granted were issued at a time when the stock's value was actually lower.

The separate criminal and civil complaints charge the former Brocade CEO "repeatedly used hindsight to select a date with a lower stock price from the recent past as the supposed option grant date," according to a statement.

Jensen assisted Reyes by falsifying paperwork supporting the backdating, according to the charges.

"In some instances, employment offer letters and compensation committee minutes were falsified and purported to document option grants to employees before they had even been hired by the company," continued the statement.

As a result of the alleged stock options manipulation, the company was able to avoid accounting for the grants as an expense.

Brocade has had to revise its financial statements spanning fiscal years 1999 through 2004. Following the restatement, both Reyes and Canova resigned from their Brocade executive posts.

SEC enforcement director Linda Chatman Thomsen said in a statement by altering records "Reyes and Jensen knew investors would be given a false portrait of Brocade's financial condition."

Responding to the charges, Brocade said in an announcement the company has made changes to strengthen its procedure, including the departure of top executives.

"No executive officers involved in the historical stock option granting practices remain employed with Brocade," according to a statement.

Brocade said it has reserved $7 million for a settlement it is offering the SEC.

U.S. Attorney Ryan and the FBI announced last week a joint task force targeting the practice of backdating when stock options are granted.

As internetnews.com reported, Ryan charged companies involved in manipulating stock option grants could be charged with fraud or tax violations.

"We will evaluate the facts of each case, and we will bring criminal charges when appropriate," Ryan said in a statement.

SEC Chairman Chris Cox, talking to reporters Thursday, said his agency's investigation of back-dated stock options now includes 80 companies. He called the widening probe into stock option "poisonous to an effective marketplace."

Cox vowed the SEC will "stamp out fraudulent backdating," which "strikes at the heart of investor confidence."

A number of high-profile companies, including Apple, job site Monster.com and others have been forced to either restate earnings or announce internal investigations faced with real or potential SEC questioning regarding stock options.