Speech by SEC Staff:
Remarks at Press Conference on Actions Against Brocade Communications Systems, Inc.
Linda Chatman Thomsen
Director, Division of Enforcement
U.S. Securities and Exchange Commission
San Francisco, Calif.
July 20, 2006
In addition to the criminal charges you've just heard described, and as the Chairman noted, the SEC has filed today civil fraud charges against Gregory Reyes and Stephanie Jensen, both of whom have been criminally charged. The SEC has also charged with civil fraud Brocade's former CFO, Antonio Canova. As set forth in the SEC's complaint, the fraudulent scheme, which was orchestrated by Mr. Reyes, resulted in massive misrepresentations of Brocade's expenses, its income and its option granting practices to Brocade's shareholders and the investing public. The fraud, we allege, was designed to provide especially low-priced options to employees, while avoiding associated compensation expenses.
Ms. Jensen, we allege, who was the Vice President of Human Resources, implemented a system that enabled Mr. Reyes to pick the lowest possible stock price during a given period as the option grant price. Among other things, Ms. Jensen prepared falsely dated meeting minutes and created false employee documents. The scheme was blatant-Mr. Reyes granted options to individuals on a date weeks or even months before they had been hired, including to people that Mr. Reyes was personally, actively recruiting.
In the SEC's action, we allege that former CFO Antonio Canova became complicit in this fraud by covering up the scheme when he learned that documents were being forged to allow options grants. After learning of the forgeries, Mr. Canova continued to sign Brocade's false financial statements.
The chart, which is to my left and up on the easel, is a compelling picture of some of the conduct here. The graph shows the fiscal 2002 stock price for Brocade, and red dots are option grant prices. As you can see, all of those dots are at quarterly or monthly low points.
To be sure, as has been mentioned, stock options are an important part of a company's ability to incentivize and compensate employees. However, when companies use options they need to follow the rules and be straight with their shareholders. The fraudulent conduct by Gregory Reyes, Stephanie Jensen and Antonio Canova concealed millions of dollars of employee compensation expenses from Brocade's shareholders and its auditor.
The Commission's action today in San Francisco arises from a coordinated effort at the SEC to pursue financial fraud involving stock options, not only here in Silicon Valley, but across the nation. This case will not be the last. Teams of attorneys and accountants in the SEC's Enforcement Division around the country are actively pursuing dozens of investigations. Undisclosed options backdating is an assault on the integrity of financial reporting by public companies which is the cornerstone of our financial markets. The SEC is committed to addressing this illegal conduct wherever and whenever it arises.