Former Brocade Execs Face More Charges

Gregory Reyes, Brocade's former president, chairman and CEO, and Stephanie Jensen, the company's former vice president of human resources, were charged in a 12-count indictment with a scheme to backdate stock option grants to give employees favorably priced options without recording necessary compensation expenses, according to the statement, issued by U.S. Attorney Kevin Ryan.

The Justice Department continues to signal its intention to take a hard line against individuals that have been implicated in the ongoing scandal over historical stock options granting practices — Thursday's indictment was handed down just one day after three executives from software vendor Comverse Technology Inc. were charged with orchestrating a scheme to manipulate the grant of millions of Comverse stock options to themselves and to employees.

The Justice Department said Thursday's indictment charges both defendants with eight counts each, including charges of conspiracy to commit securities fraud, securities fraud, mail fraud, making false statements in SEC filings, and falsifying books and records.

Reyes has been further charged with four counts of making false statements to Brocade's auditors, according to Thursday's statement.

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"Today's indictment brings additional charges, including conspiracy, falsifying SEC filings and making false statements to auditors," Ryan said through the statement. "The indictment alleges that this backdating scheme contributed to the restatements of hundreds of millions of dollars of Brocade's financial results."

According to the indictment, Reyes and Jensen regularly caused Brocade to grant "in-the-money" options for which the exercise price was lower than the company's stock price on the day of the grant to Brocade employees between 2000 and 2004. The indictment alleges that the pair backdated documents to make it appear that the options were being granted at fair market value on the "strike" date, concealing millions of dollars in expenses from investors.

Fair market value stock options grants did not need to be expensed prior to implementation of the FAS-123 accounting standard last year. But "in the money" options, or those granted below fair market value, should have been recorded as a compensation expense, according to the Justice Department.

The indictment alleges that Reyes and Jensen repeatedly used hindsight to select a date with a lower stock price from the recent past as the supposed option grant date. To facilitate the scheme, Jensen allegedly created, or directed others to create, paperwork making it appear that the options had been granted on the earlier date, according to the Justice Department. In some instances, employment offer letters and compensation committee minutes were allegedly falsified and purported to document option grants to employees before they had even been hired by the company, according to the indictment.

"The indictment alleges that these defendants altered and backdated board of director meeting minutes and employment offer letters in a scheme to defraud in connection with the pricing and granting of stock options," 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 accurately."

Brocade eventually restated and revised its financial statements for fiscal years 1999 through 2004 in light of its historical stock options impropriety, resulting in material changes of hundreds of millions of dollars.

All but one of the counts brought against Reyes and Jensen carry maximum penalties of 20 years and prison and a $5 million fine, plus restitution. Count one, conspiracy to commit securities fraud, carries a maximum statutory penalty of five years and a fine of $250,000.

Reyes and Jensen are scheduled to appear for a court hearing here Aug. 30.

The Justice Department said the indictment is the result of 18-month investigation by the FBI. The investigation is ongoing, the Justice Department said.

Last month, the Justice Department and the U.S. Securities and Exchange Commission (SEC) separately filed criminal and civil securities fraud charges against Reyes and Jensen. The SEC also filed charges against Brocade's former chief financial officer, Antonio Canova, at that time.

Judge Edward Chen Wednesday declined to dismiss the original charge against Reyes and Jensen, according to media reports.

More than two dozen high-tech firms have been implicated in the controversy over historical stock options backdating. At a news conference here last month to announce the original indictment against the former Brocade executives, SEC Chairman Christopher Cox said his agency is investigating more than 80 companies.

Ryan last month created a backdating task force to investigate allegations that Silicon Valley companies and individuals defrauded shareholders by retroactively changed grant dates for stock options. Ryan has declined to specify how many companies the task force is investigating, but a number of companies have acknowledged being subpoenaed by Ryan's office in SEC filings.