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.

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