- The Washington Times - Thursday, July 20, 2006

The government took criminal action for the first time yesterday against executives suspected of padding corporate pockets by backdating hundreds of millions of dollars worth of compensation in stock options.

A securities fraud complaint was filed against officers of Brocade Communications Systems Inc.

The U.S. attorney in San Francisco and the Securities and Exchange Commission charged Gregory L. Reyes, the former president of Brocade, and former Vice President Stephanie Jensen with routinely backdating stock-option grants from 2000 to 2004 to ensure they and other top employees made big profits cashing in the stocks without having to report any compensation expenses to investors.

The case comes at a time when the compensation of executives and top professionals has been growing exponentially faster than the wages of average workers largely because of the use of stock options as a replacement for and addition to salaries at technology companies and other corporations.

Yesterday’s indictment of the Brocade officers on one count of securities fraud is the first of what could be dozens of actions coming out of 80 investigations started by the SEC and the FBI since last year into the manipulation of stock options at U.S. companies in technology and other fields.

“This backdating scheme contributed to the restatements of hundreds of millions of dollars of Brocade’s financial results,” said U.S. Attorney Kevin V. Ryan, asserting that the defendants altered and backdated a variety of documents, including board of directors meeting minutes and employment-offer letters, to enable them to make big profits on the stock options.

In some cases, the executives forged documents to show they had granted stock options to employees before they were hired, the complaints said. Mr. Reyes had sole authority to grant options at the San Jose, Calif., maker of data storage devices, Mr. Ryan said.

Mr. Reyes and Ms. Jensen, who resigned after the backdating came to light last year, are scheduled to be arraigned before the U.S. District Court in San Francisco Aug. 2. Both proclaimed their innocence.

It is not clear how much Mr. Reyes and other Brocade executives personally profited from the backdating, which was used not only to plump up their own earnings but also to recruit and retain talented employees for the company, said Linda Chatman Thomsen, the SEC’s enforcement director.

The SEC in its civil complaint charged a third Brocade executive, former Chief Financial Officer Antonio Canova, with abetting the compensation scheme by certifying the falsified documents in filings before the commission, despite warnings that they were doctored.

The executives profited if only because the false picture of financial prosperity they created by leaving the stock compensation out of financial statements boosted Brocade’s stock price and increased the value of their own compensation package, Ms. Thomsen said.

Richard Marmaro, attorney for Mr. Reyes at Skadden Arps, Slate, Meagher & Flom, said no crime was committed because the chief executive did not profit from the maneuvers.

“Financial gain is always the motive in securities fraud cases, and here there was none,” he said. “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.”

Proving that the Brocade executives personally profited from the scheme is not necessary to prove securities fraud, said FBI acting special agent Arthur Balizan, because the charges mostly involve defrauding investors by filing false financial statements.

Ms. Thomsen said some of the employees who received the stock options may not have been aware their documents had been forged and did not participate in the securities fraud scheme purportedly directed by the company executives.

The investigations of the Brocade officers and other corporate executives could lead to charges for tax evasion and other crimes, Mr. Balizan said, adding that the Treasury Department might be asked to join the investigations as tax issues become more prominent.

Many of the investigations involve backdating of stock options during the technology boom and bust years in the late 1990s and early 2000s, he said. It was during that period that tax payments on stock options and other stock-related gains produced record revenue for federal and state governments, enabling them to balance their budgets and — at the federal level — go into surplus for the first time.

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