Ex-Brocade CEO charged with securities fraud

The US Attorney's Office, the Securities and Exchange Commission (SEC) and the FBI have filed criminal and civil securities fraud charges against Gregory Reyes, the former chief executive, president and chairman of storage firm Brocade Communications Systems.

The authorities have also accused Stephanie Jensen, the firm's former vice president of human resources, of the same crimes.

It is alleged that the pair "routinely backdated stock option grants to give employees favourably priced options without recording necessary compensation expenses".

The US Department of Justice said that the actions were among the first cases involving manipulation of stock option grants in violation of federal securities laws and other criminal statutes.

The lawsuits have been brought as the result of 18-month investigations by the SEC and the FBI.

US Attorney Kevin V. Ryan said: "The criminal charges filed today allege that this backdating scheme contributed to the restatements of hundreds of millions of dollars of Brocade's financial results.

"The criminal complaint 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.

"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."

Richard Marmaro, the lawyer acting for Reyes, insisted that that no case should have been brought.

"Greg Reyes is innocent, and if necessary we will prove his innocence in a court of law," said Marmaro, a partner in the Los Angeles office of Skadden, Arps, Slate Meagher & Flom.

"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. Nor is there any evidence of an intent to misstate the financial statements of the company."

Marmaro said that it is "surprising" that, in an area where the government is investigating at least 60 companies on allegations of stock options accounting irregularities, it would choose to charge Reyes.

He asserted that Reyes is not even alleged to have granted himself any of the options at issue in the case.

Marmaro added that Reyes did what Brocade's board of directors authorised him to do when he awarded options to new and current employees of the company in a bid to attract and retain talent.

"Additionally, the amounts of under-reported stock option compensation expenses alleged in this case did not have any impact on the company's financials or on the value of the stock," said the lawyer.

"If there were companies or individuals that blatantly violated Federal securities laws with an intent to misstate the company's financials, they should be called to account for it. This is absolutely not one of those cases.

"If Greg Reyes is charged, when the evidence comes out in court he will unquestionably be found innocent, and everyone will wonder why the government indicted him in the first place."