Brocade Exec Guilty in Stock Option Case

The Associated Press
Thursday, December 6, 2007; 7:24 AM

SAN FRANCISCO -- The former vice president of human resources at Brocade Communications Systems Inc. was convicted Wednesday in the company's second criminal stock options backdating case to go to trial.

After deliberating for one day, a federal jury in San Francisco found Stephanie Jensen guilty of conspiracy and falsifying corporate records, the only charges she faced.

Jensen, who wiped away tears as the verdict was read, is to be sentenced March 12. She faces up to 20 years in prison, prosecutors said.

After the judge and jury left the courtroom, Jensen sobbed for several minutes while embracing her husband, Greg. Jensen and her lawyer, Jan Little, both declined to comment.

Prosecutors said the verdict underscores the importance of pursuing executives believed to have engaged in options-related accounting shenanigans.

"The integrity of our stock markets depends on the accuracy of the books and records of a public company. Accordingly, prosecuting securities fraud and manipulation will remain one of this office's top priorities," U.S. Attorney Scott Schools said in a statement.

Jensen, 50, who worked at Brocade from 1999 to 2004, is one of about a dozen executives from different companies who have been criminally charged by the Justice Department over alleged tampering with stock option awards _ a practice that hides the true costs of those awards from investors.

The government's crackdown on options cheaters, launched last year, is based on accounting rules that require public companies to record as employee compensation any options grants with intrinsic financial value when they're awarded. Many companies didn't follow the regulation, which made their profits look greater than they were.

About 200 companies have been targeted by Justice Department and Securities and Exchange Commission investigations, and many have had to restate their finances, erasing billions of dollars in previously reported profits and leading to the ouster of dozens of corporate officers.

San Jose-based Brocade, a dot-com-era high flyer, used its generous options awards as incentives in a fierce battle to recruit new engineering and sales talent, offering bigger compensation packages while keeping options-related compensation charges off the company's books.

The company makes switches and software used to connect corporate servers to their data-storage machines.

Prosecutors alleged Jensen doctored offer letters and other personnel documents in a scheme from 2000 to 2004 to make it appear that prized new workers were hired _ and awarded stock options _ before they actually were.

During the weeklong trial, Little argued that her client doesn't have a finance background and wasn't aware that the doctored paperwork was helping the company circumvent accounting rules.

Little argued that Jensen was simply implementing the compensation practices that were already in place when she joined the company and never believed they were wrong or possibly illegal.

Prosecutors said statements she made to colleagues revealed she knew she was doing something wrong.

Former subordinates of Jensen's at Brocade testified she told them not to communicate by e-mail about the company's options practices.

Employee Robert Morris testified that when he questioned Jensen about options-related information he was charged with entering into an internal database, she said she wouldn't make him do anything he was uncomfortable with.

"If they ever come after us, they will come after me and Greg," Jensen then said, according to Morris. She didn't specify who "they" were.

Jensen's former boss, former Brocade Chief Executive Gregory Reyes, was convicted in August on 10 counts of securities fraud for orchestrating the options scheme. He was responsible for approving the backdated awards.

Reyes, who also faces up to 20 years in prison, was the first executive to go on trial over stock options shenanigans. His sentencing is set for Dec. 19.

Prosecutors allege Reyes and Jensen formed a criminal partnership to alter Brocade's books and records.

Though they were both initially charged with similar counts, the government unexpectedly dropped most of the charges against Jensen, stripping away the more serious allegations of securities fraud and leaving her with the conspiracy and falsifying records charges.

© 2007 The Associated Press