Ex-Brocade CEO may face criminal charges

blog "Developments" in ongoing probe of stock option backdating to be announced at afternoon press conference.

The former chief executive of Brocade Communications Systems may be the subject of criminal and civil charges to be announced by federal prosecutors on Thursday afternoon.

"We fully expect charges to be filed," said Richard Marmaro, an attorney for Gregory Reyes, Brocade's former CEO.

The Securities and Exchange Commission, FBI and U.S. Attorney's office in San Francisco are holding a joint press conference at 2 p.m. PST to announce "developments" in their ongoing probe of stock option backdating.

While the announcement did not name any company, the file name of the Microsoft Word document was "brocademedia.doc." A spokeswoman for Brocade, which was the subject of a lengthy front-page article published earlier on Thursday by the Wall Street Journal, said, "I don't have any comment."

The SEC has filed a civil complaint against three former Brocade executives, said an SEC attorney who spoke to CNET News.com on condition of anonymity.

The commission has filed a complaint against Reyes, Stephanie Jensen, former vice president for human resources, and Antonio Canova, former chief financial officer, the attorney said.

"We did not intend to disclose that in what we sent out," said Robert Leach, an attorney in the SEC's San Francisco office. Leach said he's "not authorized at this point" to offer details about the announcement.

The press conference comes a week after U.S. Attorney Kevin Ryan announced the formation of a joint task force that he said would "bring criminal charges when appropriate" against Northern California companies that engaged in unlawful stock option backdating.

Allegations about stock option backdating, which is not necessarily illegal, have ensnared dozens of companies and drawn the attention of securities regulators and plaintiffs' lawyers.

Stock option recipients have the right to buy a share of a company's stock at a price called the strike price, the value of the stock on a certain date. If the strike price is $10 and the shares now trade at $15, each option would be worth $5. (The options would be worthless if the stock fell below $10.)

If an executive is able to change the date retroactively--for instance, to when the stock was trading at a lower price--the options would become more lucrative.

That's precisely what federal investigators are looking into. Some academic research has suggested that many companies have engaged in the practice--which could be a securities fraud violation if the disclosures accompanying stock option grants were intentionally misleading. Tax laws could also be triggered because of different rates for deducting different types of stock options.

Thursday's Wall Street Journal article, citing former employees, reported that Brocade engaged in practices such as altering start dates, creating one-man options committees, and permitting part-time employment as a way to accelerate stock option grants.

CNET News.com's Dawn Kawamoto contributed to this blog.

 

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