Reyes Charged With Fraud

Greg Reyes has become the first CEO to face criminal charges in the stock options scandal.

The U.S. Attorney's Office office today filed fraud charges against the former Brocade boss and the company's former human resources VP Stephanie Johnson. (See Reflections on Reyes.)

Reyes, Johnson, and former CFO Tony Canova were also named in a civil complaint filed by the SEC. The U.S. Attorney's Office charges that Reyes and Johnson "routinely backdated stock option grants to give employees favorably priced options." Reyes and Johnson will be ordered to appear in court August 2.

The civil suit claims Canova learned of the backdating after joining Brocade, but did not tell the company's auditors and signed false and misleading financial statements and SEC filings.

The U.S. Attorney's Office said the charges resulted from an 18-month investigation by the SEC and the Federal Bureau of Investigation (FBI). If the executives are convicted, the maxiumum penalty is five to 20 years in prison plus a $5 million fine."The criminal charges filed today allege that this backdating scheme contributed to the restatements of hundreds of millions of dollars of Brocade's financial results," U.S. attorney Kevin Ryan said in a statement. "The criminal complaint alleges that these defendants altered and backdated board of director meeting minutes and employment offer letters in a scheme to defraud in connection with the pricing and granting of stock options. It is integral to the public trust in our financial markets that books and records are maintained honestly, and that the true financial condition of public companies is disclosed accurately."

Reyes's attorney Richard Marmaro released his own statement claiming his client's innocence.

"Greg Reyes is innocent, and if necessary, we will prove his innocence in a court of law," Marmaro said in a statement. "If Greg Reyes is charged, it will have been a sad day for justice, a day where the Department of Justice and the Securities and Exchange Commission have acted, not based on the facts or the merits of this case, but on some perceived need to show quick action in response to the stock option issues being discussed in the media."

Marmaro said Reyes received no financial gain because he did not grant himself backdated options. "All he did was what his board authorized him to do," the lawyer said.

Reyes may not be the last CEO charged, considering at least 80 companies are under investigation. (See Vendor Options Draw SEC Scrutiny.) Today's announcement comes 19 months after Reyes stepped down as Brocade's CEO and the company disclosed it would restate earnings after an internal audit into stock compensation procedures. (See Brocade Switches CEOs, Restates .) Reyes was to remain with the company as a consultant, but Brocade severed ties with him in May of 2005. (See Brocade Blasts 'Consultant' Reyes.) Canova stepped down last December. (See Brocade CFO Resigns.)Brocade has disclosed it set aside money for a settlement with the SEC, but no current Brocade employees were named in the criminal or civil charges.

"No executive officers involved in the historical stock option granting practices remains with Brocade," said a Brocade spokeswoman, who added there is no update on the proposed settlement with the SEC.

Dave Raffo, Senior Editor, Byte and Switch