Brocade stock backdating trial gets underway

Scheme was "simple, ingenious and a total fraud"

By Julia Cheever

November 27, 2007

The second federal trial in the nation in a stock options backdating case began in San Francisco yesterday with a defense attorney telling jurors that a former Silicon Valley executive had no criminal intent.

Defense attorney Jan Little said former Brocade Communications Systems Inc. vice president Stephanie Jensen "never for one second thought the documents were false or wrong, let alone illegal."

Jensen, 49, of Los Altos, was vice president for human resources of the San Jose-based computer networking company from 1999 to 2004.

She faces one count of conspiracy to falsify company books and one count of falsifying books.

Her trial in the court of U.S. District Judge Charles Breyer is expected to last about two weeks. Jurors heard opening statements from prosecution and defense attorneys and then began hearing from prosecution witnesses.

Stock options are used as a compensation or recruiting tool and enable employees to buy company stock. Putting an earlier date on an option allows an employee to buy shares at a lower price and thus a greater profit.

Backdating is not illegal in itself, but it is illegal to fail to record the practice as a compensation expense in company books.

Little told jurors that Jensen was following an established company procedure and was obeying instructions from her boss, former Brocade Chief Executive Officer Gregory Reyes, when she prepared options with earlier dates.

But prosecutor Adam Reeves said in his opening statement that federal attorneys intend to prove that Jensen knew the backdating was wrongful and tried to hide it.

Reeves said an alleged backdating scheme by Reyes and Jensen was "simple, ingenious and a total fraud."

Reyes, 44, of Saratoga, is the only other person in the nation to have gone to trial thus far in a federal backdating case. He was convicted in Breyer's court in September of 10 counts including securities fraud, conspiracy and falsifying company records and is awaiting sentencing.

The U.S. Justice Department and U.S. Securities and Exchange Commission have investigated several dozen corporations in a backdating probe. Prosecutors say federal criminal charges have been filed in a "handful" of those cases.

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