Brocade's Not Out of the Woods

Getting financials in order doesn't end DOJ investigation

November 16, 2005

2 Min Read
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5:30 PM - Although Brocade dodged a bullet by refiling earnings reports to beat todays Nasdaq deadline and stave off getting delisted, it still has a sword dangling over its head. That sword is in the form of a Securities and Exchange Commission and Department of Justice investigation into the way it handled stock options expensing. (See Brocade Makes Deadline, Mediatrix Names Pres, and Brocade Being Investigated.)

Getting delisted from Nasdaq would have been embarrassing but not critical to Brocade. It has lived with an E added to the end of its ticker symbol since June for being out of compliance, and it could have continued to trade its stock on the pink sheets.

The investigation, however, has the potential to bring real damage to Brocade in the form of fines, lawsuits, and even indictments. Until it gets cleared by the SEC and DOJ, the company remains under the financial cloud that has dogged it since January, when it first announced an earnings restatement and CEO Greg Reyes stepped down. (See Brocade Switches CEOs, Restates .)

The restatements Brocade filed Monday result in a stock-based expense increase of $723 million from 1999-2004, with $67.6 million of that coming in 2001 and 2002. That lowered Brocade’s earnings per share by $0.06 in each of those years.

Things aren't looking bad financially. Investors seem happy with the restatement, as the stock price rose more than 17 percent Monday on the first day of trading after the news. And customers seem OK with Brocade's situation, too: According to Wall Street analysts, Brocade may have snapped out of a two-quarter slump in the period that ended in October, despite efforts by rivals Cisco and McData to use its financial situation against it.Still, something tells me the people in Brocade’s boardroom -- and perhaps some former execs -- won’t breathe easy until they find out the investigators are also satisfied with what they see.

— Dave Raffo, Senior Editor, Byte and Switch

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