Ex-Brocade CEO Reyes Charged With Fraud

U.S. Attorney Kevin Ryan speaks at a news conference at the Securities and Exchange Commission offices in San Francisco, Thursday, July 20, 2006. Gregory L. Reyes, the former chief executive of Brocade Communications Systems Inc., was charged on Thursday with fraud, the first criminal complaint in a stock options probe that involves more than 55 U.S. companies. Reyes, 43, became the first chief executive to be charged criminally for improper practices related to the accounting of stock options grants. (AP Photo/Paul Sakuma) (Paul Sakuma - AP)

SAN FRANCISCO -- The former chief executive of Brocade Communications Systems Inc. was charged Thursday with fraud, the first criminal complaint in a stock options probe that involves more than 55 U.S. companies.

Gregory L. Reyes, 43, became the first chief executive to be charged criminally for improper practices related to the accounting of stock options grants.

Reyes and another executive, Stephanie Jensen, 48, also face civil charges by the Securities and Exchange Commission, according to a release issued jointly by that agency and the U.S. Attorney's office in San Francisco. If found guilty, each faces a maximum penalty of 20 years in prison and a $5 million fine.

Antonio Canova, Brocade's former chief financial officer, is also named in the SEC suit. He allegedly signed off on financial documents after being warned that option paperwork had been forged, according to the complain.

Attorneys for Reyes and Jensen, Brocade's former vice president of human resources, said in separate statements that their clients were innocent. Canova could not immediately be reached for comment.

Reyes resigned in January 2005. That was shortly after the San Jose-based maker of data storage devices said an internal audit had uncovered suspicious accounting of stock options, which allow employees to buy shares of their company's stock in the future at a set price _ and potentially reap a big windfall if share prices later rise.

Brocade, which was once worth as much as $24 billion, had to restate financial results for fiscal years 1999 through 2004, shaving 20 cents off previously reported earnings per share figures. The company, which today is valued at about $1.6 billion, saw its shares close down 11 cents, or 1.8 percent, to $5.91 Thursday on the Nasdaq Stock Market.

At least 58 companies have disclosed that their stock options practices are being investigated by the Department of Justice or the SEC. At issue in many of the probes _ and a central allegation in Thursday's actions _ is a practice known as backdating, in which options are retroactively issued to coincide with low points in a company's share price.

The criminal complaint, filed in U.S. District Court in San Francisco, is the strongest sign yet that federal authorities plan to vigorously prosecute companies whose stock options practices skirted the law.

"It demonstrates not only a perception that the practice is unfair to outside investors, but a willingness to expend resources to correct the problem and help restore public faith in the process," said James Aquilina, a former assistant U.S. attorney who has prosecuted dozens of white collar crimes.

Stock options give a person the right to buy shares in the future at a set fee, often called an exercise price. If the stock price rises following the grant of the options, they can represent a profit worth millions of dollars.

According the complaints, Reyes and Jensen authorized options grants with exercise prices that were below the price of Brocade's stock on the day they were issued, giving the recipients an immediate paper profit.