The charges against two former executives of Brocade Communications Systems Inc. for alleged fraud are the strongest sign yet that a stock options probe involving at least 80 companies will probably widen in coming months, legal and accounting experts said.
Brocade's former CEO, Gregory L. Reyes, 43, and Stephanie Jensen, 48, the company's former vice president of human resources, became the first two individuals to be criminally charged over allegedly improper accounting of stock options. The criminal complaints, and a corresponding civil lawsuit, on Thursday indicate corporate executives can expect plenty more scrutiny.
''There's going to be lots of anguish going on until the regulators think they've finished their investigation,'' said Richard Dietrich, a professor at Ohio State University's Fisher College of Business. ''The message is: We're going to go after you in every way we can if you've engaged in this.''
If found guilty, each faces a maximum penalty of 20 years in prison and a $5 million fine.
Antonio Canova, Brocade's former chief financial officer, is also named in the SEC suit. He allegedly signed off on financial documents after being warned that option paperwork had been forged, according to the complain.
Attorneys for Reyes and Jensen said their clients were innocent. Canova could not be reached for comment.
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. The company is now valued at about $1.6 billion.
At least 58 companies have disclosed that their stock options practices are being investigated by the Department of Justice or the SEC. At issue in many of the probes -- and a central allegation in Thursday's actions -- is a practice known as backdating, in which options are retroactively issued to coincide with low points in a company's share price.
But SEC Chairman Christopher Cox, at a news conference in San Francisco, said his agency is probing at least 80 companies.
Stock options give a person the right to buy shares in the future at a set fee, often called an exercise price. If the stock price rises following the grant of the options, they can represent a profit worth millions of dollars.
According the complaints, Reyes and Jensen authorized options grants with exercise prices that were below the price of Brocade's stock on the day they were issued, giving the recipients 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.
Authorities also allege Reyes and Jensen regularly backdated board of director meeting minutes so that it appeared the stock options committee granted options on dates that Brocade's share price was relatively low.
The pair also had employment offer letters backdated so workers would receive options that were dated at low points in the company's share price that predated their first day of work, according to the criminal complaint.
In a release, Richard Marmaro, a Los Angeles attorney representing Reyes, criticized the allegations and said they were not based on the facts in the case.
''Financial gain is always the motive in securities fraud cases, and here there was none,'' Marmaro said in the release, which was issued shortly before authorities announced the charges. ''There is not even an allegation of self-enrichment, or self-dealing. Nor is there any evidence of an intent to misstate the financial statements of the company.''
Jan Little, a lawyer representing Jensen, also disputed the charges and said her client had no responsibility for finance or accounting.
''These charges are completely wrong-headed, and we will vigorously fight them in court,'' she said.
Companies began increasingly relying on options in the late 1990s, when executives touted them as an important compensation and retention tool and as a way to align employees' and shareholders' interests.
This site contains copyrighted material the use of which has not always been specifically authorized by the copyright owner. We are making such material available in our efforts to advance understanding of environmental, political, human rights, economic, democracy, scientific, and social justice issues, etc. We believe this constitutes a 'fair use' of any such copyrighted material as provided for in section 107 of the US Copyright Law. In accordance with Title 17 U.S.C. Section 107, the material on this site is distributed without profit to those who have expressed a prior interest in receiving the included information for research and educational purposes. For more information go to: http://www.law.cornell.edu/uscode/17/107.shtml. If you wish to use copyrighted material from this site for purposes of your own that go beyond 'fair use', you must obtain permission from the copyright owner.