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First CEO faces options charges

By ASSOCIATED PRESS
Published July 21, 2006

SAN FRANCISCO - The former CEO of Brocade Communications Systems Inc. was charged Thursday with fraud, the first criminal complaint in a stock options inquiry involving more than 55 U.S. companies.

Gregory L. Reyes, 43, became the first chief executive to be charged criminally for improper practices related to the accounting of stock options grants.

Reyes and another executive, Stephanie Jensen, also face civil charges by the Securities and Exchange Commission, according to a release issued jointly by that agency and the U.S. Attorney's office in San Francisco.

Reyes resigned in January 2005. That was shortly after the San Jose-based maker of data storage devices said an internal audit had uncovered suspicious accounting of stock options, which allow employees to buy shares of their company's stock in the future at a set price - and potentially reap a big windfall if share prices later rise

Brocade, which was once worth as much as $24-billion, had to restate financial results for fiscal years 1999 through 2004, shaving 20 cents off previously reported earnings per share figures.

At least 58 companies have disclosed that their stock options practices are being investigated by the U.S. Department of Justice or the SEC. At issue in many of the probes, and a central allegation in Thursday's actions, was a practice known as backdating, in which options are retroactively issued to coincide with low points in a company's share price.

The criminal complaint, filed in U.S. District Court in Northern California, is the strongest sign yet that federal authorities plan to vigorously prosecute companies whose stock options practices skirted the law.

According the complaints, Reyes authorized options grants with exercise prices that were below the price of Brocade's stock on the day they were issued, giving the recipient an immediate paper profit.

Reyes, who in 2000 landed on Forbes' list of the 400 richest Americans, then backdated the documents so strike prices appeared to be the same as the company's share price on the date they were issued, according to the complaints.

Companies began increasingly relying on options in the late 1990s, when corporate executives touted them as an important compensation and retention tool and as a way to align employees' and shareholders' interests.

[Last modified July 20, 2006, 23:41:17]