Magistrate refuses to dismiss Brocade Communications backdating charge

By Julia Cheever, Bay City News Service

August 10, 2006

SAN FRANCISCO (BCN) - A federal magistrate in San Francisco refused yesterday to dismiss a securities fraud charge against two former executives of Brocade Communications Systems Inc. who are accused of backdating employee stock options.

U.S. Magistrate Edward Chen said there were "sufficient indicia for liability" in an FBI affidavit in a July 20 criminal complaint against former Chief Executive Officer Gregory Reyes and former Vice President of Human Resources Stephanie Jensen of San Jose based Brocade.

Lawyers for Reyes, 43, of Saratoga, and Jensen, 48, of Los Altos, argued unsuccessfully before Chen that the charges should be dismissed because the executives lacked criminal intent.

Attorney John Keker, representing Jensen, contended, "Jensen's position as a human resources director is that she knew nothing from nothing about accounting practices."

Chen set Aug. 30 as the next court date in the case, for either a preliminary hearing on the criminal complaint or for arraignment on an indictment if one is issued by a grand jury by then.

Brocade is a computer networking company.

Reyes and Jensen are the first two executives to be charged in a nationwide federal probe of 80 companies that may have engaged in backdating stock options.

Backdating has been used as a recruiting and compensation tool and enables employees to buy stock at a lower price and thus higher profit.

Reyes and Jensen are accused of engaging in securities fraud by backdating millions of stock options between 2000 and 2004 and then failing to record the resulting cost to the company as employee compensation expenses on Brocade's financial statements.

The affidavit by FBI Agent Joseph Schadler alleges that they also backdated job offer letters and minutes of the compensation committee of company's board of directors to conform to the backdating of the stock options.

Reyes was CEO of Brocade from 1998 to January 2005 and Jensen held her job from 1999 to 2004.

The affidavit says that after an internal audit of employee compensation expenses related to the stock options, Brocade revised its financial statements in 2005 to show a decrease of $280 million in income for the period between 1999 and 2004.

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