U.S. SECURITIES AND EXCHANGE COMMISSION
Litigation Release No. 20137 / May 31, 2007
Securities and Exchange Commission v. Brocade Communications Systems, Inc., Case No. 07-2821 (JCS) (N.D. Cal. May 31, 2007)
Brocade to Pay $7 Million Penalty to Settle Charges for Fraudulent Stock Option Backdating
The Securities and Exchange Commission announced today the filing of a civil action against Brocade Communications Systems, Inc., a San Jose, California computer networking company, for falsifying its reported income from 1999 through 2004. Brocade has agreed to pay a penalty of $7 million to settle the charges that it committed fraud through its former CEO and other former executives who repeatedly granted backdated stock options, misstated compensation expenses, and concealed the conduct by falsifying documents.
The Commission's complaint, filed today in federal court in San Francisco, alleges that Brocade's former CEO, President, and Chairman, Gregory L. Reyes, routinely provided extra compensation to employees by granting valuable "in-the-money" stock options for which a financial statement expense was required. In order to avoid reporting to investors the hundreds of millions of dollars in undisclosed compensation expenses, Brocade's former executives allegedly concealed the fact that the options had been granted "in-the-money" by creating records making it falsely appear that the options had been granted at a lower price on an earlier date.
As the Commission alleged in its complaint against the Company, as well as its earlier complaint against Reyes and other former executives, Brocade backdated dozens of grants for tens of millions of stock options. Among other things, Brocade personnel are alleged to have backdated large option grants for prized new hires to dates before the employees had even interviewed at the Company, creating false paperwork to make it appear the employees had been hired months earlier.
When the stock option abuses surfaced, Brocade's audit committee conducted a thorough investigation, resulting in the resignation of Reyes and the restatement of the Company's previously-reported income.
Without admitting or denying the Commission's allegations, Brocade has agreed to settle the charges by consenting to a permanent injunction against further violations of Section 17(a) of the Securities, Sections 10(b), 13(a), 13(b)(2)(A), and 13(b)(2)(B) of the Securities Exchange Act, and Rules 10b-5, 12b-20, 13a-1, 13a-11, and 13a-13 thereunder, and payment of a civil monetary penalty of $7 million.
On July 20, 2006, the Commission charged Reyes, as well as former Vice President of Human Resources Stephanie Jensen, and former CFO Antonio Canova, with fraud and other securities law violations; that action is ongoing.