Former Silicon Valley execs face stock option fraud charges
Bay City News Service
July 20, 2006
SAN FRANCISCO (BCN) - Two former top executives of Brocade
Communications Systems Inc., a San Jose-based computer networking
company, were charged with criminal securities fraud today in
the first criminal charges brought in the nationwide uproar over
The Securities and Exchange Commission and U.S. attorney's officials
said Gregory Reyes, 43, of Saratoga, Brocade's former chief executive,
and Stephanie Jensen, 48, of Los Altos, the company's former vice
president of human resources, also face a civil action charging
them with several violations of federal securities laws.
The civil action also charges Antonio Canova, 44, of Los Altos
Hills, Brocade's former chief financial officer, who is accused
of learning of the alleged backdating scheme after joining Brocade.
The maximum sentence for securities fraud is 20 years in federal
prison and a fine of $5 million, plus restitution.
Reyes and Jensen are scheduled to appear before Magistrate Judge
Joseph Spero in federal court in San Francisco on Aug. 2.
Backdating is a practice in which companies grant certain employees
options that are postdated to a time when the company's stock
price was lower than the period when the options are granted.
The employees can then cash in the options for an immediate profit.
Today's action was considered significant enough that SEC Chairman
Christopher Cox flew to San Francisco from Washington, D.C. today
to join U.S. Attorney for Northern California Kevin Ryan to announce
Cox said, "We're coordinating our efforts to show that the
full weight of the federal government is involved in stamping
Cox said, "Unfortunately, this isn't the only backdating
case" and said federal officials are investigating more than
80 companies across the nation.
Cox said backdating "goes to the heart of the relationship
between corporations and their shareholders, strikes at the heart
of investor confidence in financial statements and is poisonous
to an efficient marketplace."
Arthur Balizan, acting special agent in charge for the FBI, said
the illegal backdating of options gave a false portrait of Brocade's
financial condition and gave it an unfair advantage over its competitors.
Reyes' attorney, Richard Marmaro, said in a statement, "Greg
Reyes is innocent, and we will prove his innocence in a court
Marmaro said, "Financial gain is always the motive in securities
fraud cases, and here there was none. There is not even an allegation
of self-enrichment, or self-dealing."
Marmaro also said there isn't any evidence of an intent to misstate
the financial statements of the company.
"All he did was what his board authorized him to do,"
Marmaro said, "This is a sad day for justice" and alleged
that federal authorities "have acted, not based on the facts
or the merits of this case, but on some perceived need to show
quick action in response to the stock option issues being discussed
in the media."
Marmaro said of Reyes, "All he did was what his board authorized
him to do."
Ryan said that was the problem.
He said Reyes acted like "a committee of one" because
Brocade's board of directors granted him sole authority to grant
stock options to all employees except for certain officers and
In an affidavit, FBI special agent Joseph Schadler said Brocade
used stock options to recruit and retain qualified personnel because,
like other companies in the Silicon Valley, it faced significant
competition in luring employees.
According to the criminal and civil complaints filed today, Brocade
gave employees "in the-money," or backdated, stock options
without having to recognize compensation expenses as required
by accounting rules.
Ryan said, "It is integral to the public trust in our financial
markets that books and records are maintained honestly and that
the true financial condition of public companies is disclosed
The complaints say that when the stock option abuses surfaced
in January 2005, Brocade, which went public in May 1999, was required
to restate and revise its financial statements for fiscal years
1999 through 2004.
The restatements resulted in Brocade's company declining by a
total of $304 million between 1999 and 2001.
The company's net loss increased from $136 million to $147 million
in 2003 and from $2 million to $32 million in 2004.
However, Brocade's net income increased by $60 million to a total
of $126 million in 2002.
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