SAN FRANCISCO – LAWFUEL – Press Release Service – United States Attorney Kevin V. Ryan announced that Gregory L. Reyes, the former CEO, President, and Chairman of Brocade Communications Systems, Inc., and Stephanie Jensen, its former Vice President of Human Resources, were charged in a twelve-count indictment today with a scheme to backdate stock option grants to give employees favorably priced options without recording necessary compensation expenses. The 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. Mr. Reyes is further charged with four counts of making false statements to Brocade=s auditors. The indictment, which is among the first involving manipulation of stock option grants in violation of the federal securities laws and other criminal statutes, is the result of 18-month investigation by the FBI. Mr. Reyes and Ms. Jensen were previously charged on July 20, 2006, in a criminal complaint charging a single count of securities fraud.
U.S. Attorney Kevin V. Ryan stated, “Today’s indictment brings additional charges, including conspiracy, falsifying SEC filings, and making false statements to auditors. The indictment alleges that this backdating scheme contributed to the restatements of hundreds of millions of dollars of Brocade’s financial results. 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. 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.”
According to the indictment, Reyes, 43, of Saratoga, Calif., and Jensen, 48, of Los Altos, Calif., regularly caused Brocade to grant Ain-the-money@ options (i.e., options for which the exercise price was below the stock=s market price on the day of grant, giving the recipient an immediate paper gain) to both new and current employees between 2000 and 2004, but backdated documents to make it appear that the options were Aat-the-money@ (i.e., the exercise price was the same as the stock=s market price on the day of the grant) when granted, thus concealing millions of dollars in expenses from investors. Under well-settled accounting principles applicable at the time, options granted Aat-the-money@ did not need to be expensed. In contrast, options granted Ain-the-money@ needed to be recorded as a compensation expense.
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 created, or directed others to create, paperwork making it appear that the options had been granted on the earlier date. 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. As a result of this practice, Brocade was able to give employees Ain-the-money@ stock options without having to recognize compensation expenses as required by accounting rules. When these stock option abuses surfaced, Brocade was required to restate and revise its financial statements for fiscal years 1999 through 2004.
According to the indictment, in January 2005, Brocade announced the following restatements (fiscal years):
2004: Net loss increased from $2 million to $32 million
2003: Net loss increased from $136 million to $147 million
2002: Income increased by $60 million to $126 million
1999-2001: Income declined by a total of $304 million
Acting Special Agent in Charge Arthur Balizan said, “This complaint demonstrates the strong, cooperative relationship between the FBI and US Attorney’s office, and the successful advancement of justice achieved by these types of investigations. The illegal backdating of options alleged in this case gave the defendants an unfair advantage and misled the investing public.”
The indictment, returned today by a federal grand jury in San Francisco, charges Reyes and Jensen with the following counts:
COUNT ONE: Conspiracy to Commit Securities and Mail Fraud in violation of 18 U.S.C. ‘ 371. The maximum statutory penalty is five years and a fine of $250,000.
COUNT TWO: Securities Fraud in Connection with Brocade Stock; Aiding, Abetting and Willfully Causing; in violation of 15 U.S.C. ” 78j(b) and 78ff; 17 C.F.R. ‘240.10b-5, 18 U.S.C. ‘ 2. The maximum statutory penalty is 20 years in prison and a fine of $5 million, plus restitution.
COUNTS THREE AND FOUR: Mail Fraud; Deprivation Of Right To Honest Services; Aiding, Abetting and Willfully Causing; in violation of 18 U.S.C. ” 1341, 1346 and 2. The maximum statutory penalty is 20 years in prison and a fine of $250,000.
COUNT FIVE – SEVEN: False SEC Filing; Aiding, Abetting and Willfully Causing; in violation of 15 U.S.C. ” 78j(b) and 78ff, 17 C.F.R. ‘ 240.10b-5, 18 U.S.C. ‘ 2 . The maximum statutory penalty is 20 years in prison and a fine of $5 million, plus restitution.
COUNT EIGHT: Falsifying Books, Records, and Accounts; Aiding, Abetting and Willfully Causing 15 U.S.C. ” 78m(b)(2)(A), 78m(b)(5) and 78ff, 17 C.F.R. ‘ 240.13b2-1, and 18 U.S.C. ‘ 2. The maximum statutory penalty is 20 years in prison and a fine of $5 million, plus restitution.
Defendant Reyes was further charged with the following:
COUNTS NINE – TWELVE: False Statement to Accountant; Aiding, Abetting and Willfully Causing; in violation of 15 U.S.C. 78ff, 17 C.F.R. ‘ 240.13b2-2, 18 U.S.C. ‘ 2. The maximum statutory penalty is 20 years in prison and a fine of $5 million, plus restitution.
However, any sentence following conviction would be imposed by the court after consideration of the U.S. Sentencing Guidelines and the federal statute governing the imposition of a sentence, 18 U.S.C. ‘ 3553.
The next court hearing is set for August 30, at 9:30 a.m. before Magistrate Judge Chen. An indictment contains only allegations against an individual and, as with all defendants, Mr. Reyes and Ms. Jensen must be presumed innocent unless and until proven guilty.
Christopher J. Steskal is the Assistant U.S. Attorney who is prosecuting the case with the assistance of legal assistant Miche Sharpe.
The investigation is continuing.
Further Information:
A copy of this press release may be found on the U.S. Attorney=s Office=s website at www.usdoj.gov/usao/can.
Electronic court filings and further procedural and docket information are available at https://ecf.cand.uscourts.gov/cgi-bin/login.pl.
Judges= calendars with schedules for upcoming court hearings can be viewed on the court=s website at www.cand.uscourts.gov.
All press inquiries to the U.S. Attorney=s Office should be directed to Luke Macaulay at (415) 436-6757 or by email at Luke.Macaulay@usdoj.gov.
