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July 21, 2006
Former Brocade Execs Charged with Backdating Stock Options

Federal prosecutors and regulators have filed criminal and civil securities fraud charges against both the former chief executive and former vice president of human resources at Brocade Communications Systems, Inc., alleging that the two routinely backdated stock option grants to give employees favorably priced options without recording necessary compensation expenses.

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The complaints allege that Gregory L. Reyes, the former CEO, president, and chairman of Brocade, and Stephanie Jensen, its former VP of HR, regularly caused Brocade to grant "in-the-money" options (i.e., the exercise price is below the stock's market price on the day of grant, giving the recipient an immediate paper gain) to both new and current employees between 2000 and 2004, but backdated documents to make it appear that the options were "at-the-money" (i.e., the exercise price is the same as the stock's market price on the day of the grant) when granted, thus concealing millions of dollars in expenses from investors.

The separate criminal and civil complaints allege that Reyes repeatedly used hindsight to select a date with a lower stock price from the recent past as the supposed option grant date. To facilitate the scheme, Jensen created, or directed others to create, paperwork making it appear that the options had been granted on the earlier date, the complaints allege.

The complaints allege that in some instances, employment offer letters and compensation committee minutes were falsified and purported to document option grants to employees before they had even been hired by the company. As a result of this practice, Brocade was able to give employees "in-the-money" stock options without having to recognize compensation expenses as required by accounting rules, the complaints allege.

The SEC's civil complaint also names Antonio Canova, Brocade's former CFO, who the SEC says learned of the backdating after joining Brocade. The complaint alleges that Canova was specifically warned in writing that option paperwork had been forged to enable an employee to get favorably priced options; he took no action and failed to advise Brocade's auditors and audit committee. The complaint alleges that Canova signed false and misleading financial statements and SEC filings.

The criminal complaint, filed in federal court in San Francisco , charges Reyes and Jensen with securities fraud. The commission's civil complaint, filed in federal court charges Reyes, Canova, and Jensen with fraud and other violations of the federal securities laws, including the books-and-records, internal controls, misrepresentations to auditors, and Sarbanes-Oxley certification provisions.

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