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Magistrate rejects ex-Brocade chief's dismissal application

Heading towards trial

Internet Security Threat Report 2014

An attempt by former Brocade executives to have the charges against them for stock option irregularities dismissed was denied by a federal magistrate.

They are the first high-profile targets of a massive SEC investigation linking dozens of firms to the practice of backdating options. Ex-chief executive Greg Reyes and ex-human resources VP Stephanie Jensen were charged with securities fraud on 20 July.

Lawyers for the pair argued on Wednesday that backdating had been done to attract employees, not skew financial reporting, AP reports. Reyes' attorney Richard Marmaro said: "Nowhere in this affidavit does it allege the defendants intended that consequence." Magistrate Edward Chen replied it was a "fair inference".

Prosecutor Christopher Steskal said fasifying financial statements was "the reason they falsified the record".

Jensen's counsel John Keker pleaded her ignorance of accounting. He said: "She knows nothing from nothing about the accounting function. What she did, she thought, was completely proper."

Chen declined to grant the dismissal however. The next hearing will take place in a federal court in San Francisco on 30 August. It will determine whether there is enough evidence against the pair to go to trial.

The SEC alleges Brocade execs sought to inflate the value of option packages by changing dates of board meetings to make it appear options were granted sooner than they were. Employment offer dates were backdated to low points for the company's share price too, the authorities allege, granting their recipients an instant profit.

Although not illegal in itself, backdating can lead to financial submissions becoming distorted. The prosecution says it was behind the need for Brocade to restate five years of results between 1999 and 2004.

The storage switch maker has sought to distance itself from the case. Its 20 July statement said: "No executive officers involved in the historical stock option granting practices remain employed with Brocade."

The firm has set aside $7m to cover a settlement offer it has made to the SEC. ®

Internet Security Threat Report 2014

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