Brocade hopes to turn page with $160 million payment

Company makes history by paying one of the biggest settlements ever to end a stock option backdating lawsuit.

Correction: The dollar figure in the headline has been changed to accurately reflect the story.

From a public relations perspective, this hasn't been an auspicious year for Brocade Communications.

In January, the company's former CEO got hit with a long jail sentence for criminal misconduct. Now it's going to cost a cool $160 million for Brocade Communications to settle a federal securities class action lawsuit tied to the company's stock option backdating practices.

In a press release issued Monday afternoon, the company said it had recorded a pretax expense of $160 million related to the settlement of the charges against the company and certain former executives and officers.

Stock option backdating is not necessarily illegal. Yet allegations of wrongdoing have involved dozens of companies in Silicon Valley in the last couple of years. With a stock option, the recipient has the right to purchase a share in a company's stock at a price called the strike price. The strike price is the value of the stock on a certain date.

Securities regulators and plaintiffs' lawyers say the practice was widespread in Silicon Valley after the dot-com bust. Some companies, they charged, improperly changed the strike price retroactively to dates when their stock was trading at a lower price. So it was that in 2006, the U.S. Securities and Exchange Commission charged Brocade's former Chief Executive Officer, Gregory Reyes , with backdating stock options for the purpose of hiring new employees and improperly expensing the option grants.

In January, Reyes was sentenced to 21 months in federal prison. A federal court also found that Brocade was financially liable for Reyes' conduct.

Brocade's statement said the settlement was in the best interest of its shareholders and the company "as it significantly reduces the uncertainty associated with this ongoing litigation."

The SEC also looked into the stock backdating practices of CNET Networks, publisher of CNET News.com. The company subsequently restated over $105 million in expenses and three top officials resigned, including CEO Shelby Bonnie. The government ended its investigation in September 2007 without recommending any enforcement action.

 

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