Former CEO of Brocade guilty of fraud
Gregory Reyes, the former CEO of Brocade Communications Systems Inc. was found guilty of fraud in his stock options backdating trial. Reyes was found guilty on all 10 counts of securities fraud in a trial that lasted six weeks.
Backdating of stock options involves manipulating grant dates to those that had lower stock prices. By assigning a grant date with a low stock price, the executive receiving the options will earn a greater profit when the options are ultimately exercised. This practice can be done legally, but it must be publicly disclosed.
In this case, the prosecutors alleged that Reyes and Stephanie Jensen, Brocade’s vice president of human resources falsified records and lied to auditors and investors about the granting of stock options. Reyes was awarded “in the money” grants, which required disclosure and the recognition of compensation expense. The expense was not recognized, thereby making the financial statements false and misleading to investors.
Reyes will be sentenced on November 21, and faces the possibility of 10 or more years in prison. Brocade has already paid $7 million in fines because of SEC charges of civil fraud related to backdating.
At least 10 executives have been charged criminally for their roles in stock option backdating, and Reyes’ case is the first one to go to trial.
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