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U.S. Securities and Exchange Commission

Brocade to Pay $7 Million Penalty to Settle Charges for Fraudulent Stock Option Backdating


Washington, D.C., May 31, 2007 - The Securities and Exchange Commission announced today the filing of a civil action against Brocade Communications Systems, Inc., a San Jose, Calif., 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.

"This enforcement action clearly demonstrates the SEC will use all the weapons in our arsenal, including significant corporate penalties, to protect investors and combat fraudulent stock option backdating," said SEC Chairman Christopher Cox. "The Commission's Enforcement Division deserves particular credit for first discovering the pathology of fraudulent backdating, and then launching the broad investigation that led to today's result and those that will follow."

"Abusive options backdating is a serious financial fraud," said Linda Chatman Thomsen, Director of the Commission's Division of Enforcement. "Falsifying compensation expense is no less fraudulent than falsifying revenue, and we continue to be vigilant in policing fraudulent accounting practices."

Marc Fagel, Associate Regional Director of the Commission's San Francisco Regional Office, added, "Brocade is being held accountable for the egregious and long-running misconduct of its former CEO and other former executives who misled investors and obscured the company's financial condition and performance."

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 the antifraud, reporting, books-and-records, and internal control provisions of the federal securities laws, 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.

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For more information, contact:

Marc J. Fagel
Associate Regional Director
(415) 705-2449

San Francisco Regional Office
Securities and Exchange Commission

  Additional materials: Litigation Release No. 20137



Modified: 05/31/2007