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)

Reyes, who in 2000 landed on Forbes list of the 400 richest Americans, then backdated the documents so strike prices appeared to be the same as the company's share price on the date they were issued, according to the complaints.

Authorities also allege Reyes and Jensen regularly backdated board of director meeting minutes so that it appeared the stock options committee granted options on dates that Brocade's share price was relatively low. In fact, the authorities allege, no such meetings occurred on those dates.

The pair also had employment offer letters backdated so workers would receive options that were dated at low points in the company's share price that predated their first day of work, according to the criminal complaint.

In a release, Richard Marmaro, a Los Angeles attorney at Skadden Arps, Slate, Meagher & Flom, representing Reyes, criticized the allegations and said they were not based on the facts in the case.

"Financial gain is always the motive in securities fraud cases, and here there was none," Marmaro said in the release, which was issued shortly before authorities announced the charges. "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."

Jan Little, a lawyer representing Jensen, also disputed the charges and said her client had no responsibility for finance or accounting.

"These charges are completely wrong-headed, and we will vigorously fight them in court," she said.

Companies began increasingly relying on options in the late 1990s, when executives touted them as an important compensation and retention tool and as a way to align employees' and shareholders' interests.

In a statement, Brocade noted that none of the officers involved in the past granting of stock options remain employed with the company. Brocade has reserved $7 million to cover a proposed settlement with the SEC, which is pending approval of the commissioners.

At least 17 senior executives or directors with nine publicly traded companies _ including four CEOs, five finance chiefs and three general counsels _ have been fired or have stepped amid the expanding probe into stock options practices.

SEC Chairman Christopher Cox, at a news conference in San Francisco, said the actions show that "the full weight of the federal government is being put behind this effort to stomp out fraudulent stock options backdating."