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SEC hits former Brocade CEO first in operation 'Options Fiasco'

The new Martha Stewart

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You can slap an apron on Greg Reyes and hand him a rolling pin. The US Securities and Exchange Commission (SEC) has just turned the former Brocade CEO into the Martha Stewart of the options expensing scandal.

The SEC today hit Reyes with criminal and civil charges, alleging that the CEO backdated stock options to make compensation packages more lucrative for new workers. According to the SEC, Reyes then failed to expense the option awards properly. Reyes has become the first major executive to be charged by the SEC as part of a far-reaching probe into how companies handled stock option expenses.

The SEC has also accused Brocade's former CFO Antonio Canova and human resources VP Stephanie Jensen of helping Reyes conduct the options operation.

Richard Marmaro, a lawyer for Reyes, hit back against the SEC, saying his client "is innocent" and willing to "prove his innocence in a court of law."

"It is surprising that in an area where the government is investigating at least 60 companies on allegations of stock options accounting irregularities, the government would choose to charge Mr. Reyes. Mr. Reyes is not even alleged to have granted himself any of the options at issue in the case, nor is there even an allegation that he made any money through the alleged option irregularities," Marmaro said. "All he did was what his Board authorized him to do. During a time where competition was extremely high in Silicon Valley for employees, he awarded options to new and current employees of the company - from the receptionist to engineers - to attract and retain talent."

The options question is part of the dot-com hangover still haunting Silicon Valley. Technology companies reworked the dates of options grants in the hopes of creating more competitive pay packages during a fierce hiring boom here.

Storage switch maker Brocade hired a new CEO in January of 2005 after an internal audit turned up accounting irregularities around the way options were handled. The company maintained an amicable relationship with Reyes at first, handing him a lucrative consultancy package. Later, however, Brocade moved to sever ties with Reyes and argued that he had not been performing the consultant duties as expected.

Later in 2005, the SEC announced a formal probe into Brocade's bookkeeping.

Brocade has been forced to restate past financial results on numerous occasions. ®

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