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By | Drew Cullen 7th August 2007 22:04

Brocade ex-CEO guilty of options fraud

Vows to appeal

Gregory Reyes, the former boss of Brocade, has been found guilty of securities fraud concerning backdated options.

A San Francisco jury today convicted him on ten counts of altering the IT storage company's records and lying over option practices. Reyes could face a jail sentence of up to 20 years and a fine of $5m - small change for the gazillionaire.

In a statement today, Reyes's lawyer, Richard Marmaro expressed disappointment and vowed to appeal. "Greg did not enrich himself or gain personally from Brocade's stock option granting practices, and the government never even accused him of that," he said.

Onetime colleagues of Reyes, former human resources veep Stephanie Jensen, also faces charges of fraud and other securities law violations.

Brocade fired Reyes in January 2005, over accounting irregularities concerning backdated options. But his colleagues on the board softened the blow with a two-year consultancy contract worth $910,000 a year.

In May this year, Brocade paid $7m to settle SEC charges of falsifying reports of income through backdating and misreporting of compensation expenses between 1999 and 2004. The company neither admitted nor denied any wrongdoing.

Reyes is the first executive to come to trial over options backdating, possibly because Brocade was one of the first companies investigated by the Securities and Exchange Commission over the practice. Since then, hundreds of American companies have rushed to admit that they backdated options illegally - in other words, they changed the date of options to a time when share prices were lower than the real date when the options were actually awarded.

This was done to ensure that their recipients could make a bigger profit. In itself, the practice was not illegal - so long as it was properly accounted and for - i.e. not used to inflate profits. Also, companies needed to ensure that the appropriate income tax was paid on the awards. Many fouled up on both counts. ®

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