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Wall Street Roundup

Jury told no harm done by backdating

June 19, 2007|From Times Wire Services

Brocade Communications Systems Inc.'s former chief executive approved backdated stock option grants to lure employees during Silicon Valley's boom years, but he did not defraud investors, his lawyer said Monday.

Former Brocade CEO Gregory Reyes' defense disputed government fraud charges and stressed that he did not personally profit from such practices.

"Greg Reyes did not pocket a penny from the stock options. No one lost any money here," Reyes' attorney, Richard Marmaro, told jurors in opening arguments in U.S. District Court in San Francisco.

Reyes is the first executive to be tried on criminal charges resulting from probes of more than 140 U.S. companies in the last year. His fate in court could set a precedent for how aggressively U.S. regulators and prosecutors pursue other executives in similar cases.

Prosecutors contend that Reyes orchestrated a four-year effort to deceive shareholders and regulators by not following rules governing the accounting treatment of stock option grants. His conduct inflated earnings at Brocade, a San Jose-based data-storage networking company, the prosecutors said.

"This case is about a person who misused his position of power, who misused the trust placed in him by shareholders," Assistant U.S. Atty. Timothy Crudo told jurors.

The criminal indictment against Reyes charges him with conspiracy to commit securities fraud, mail fraud, making false statements in filings with the Securities and Exchange Commission and falsifying books and records.

He could face decades in prison and millions of dollars in fines if convicted.

An option is the right to buy a company's stock at a set price -- called the exercise price -- during a set period. The option holder can make a profit if the stock's price tops the exercise price during the period.

Auditors and regulators are examining many companies to determine whether they made it appear that option grants coincided with dates when the stock price was lower than on the actual grant dates. Such a practice would increase the potential gain for the recipients of the options.

Prosecutors said the practice was widespread in the technology industry, when companies were hungry for talented engineers and programmers but often short on cash needed to attract and keep them. Stock options became the "coin of the realm," Crudo told jurors.

At the time, publicly traded U.S. companies were required to record the value of options as an expense only if their exercise price was lower than the stock price on the grant date. They did not have to report options as expenses if the exercise prices were the same as the market price on the day of the grant.

Under current U.S. accounting regulations, all stock options have to be recorded as expenses.

Marmaro said Reyes relied on assurances from Brocade's finance and human resources experts and its accountants that option backdating was legal.

Brocade last month agreed to pay a $7-million penalty to settle SEC charges of fraudulent stock option backdating.

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