Former top executives of Brocade Communications Systems will face civil and criminal charges related to allegations of stock option backdating.
Federal officials announced the charges against Gregory Reyes, Brocade's chief executive until 2005, and Stephanie Jensen, the company's vice president of human resources from 1999 to 2004, at a press conference in San Francisco on Thursday.
The widely-anticipated charges are the first in what could be a number of prosecutions of northern California companies and their executives related to stock option backdating, which is illegal in some circumstances. The Securities and Exchange Commission says it has over 80 active investigations nationwide.
The SEC has filed a complaint against Reyes, Stephanie Jensen, former vice president for human resources, and Antonio Canova, the former chief financial officer.
The press conference comes a week after US 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.
A Thursday 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.
