Last week the Do J brought criminal charges against two Brocade Communications Systems executives, while the SEC filed a civil suit against the same two and the CFO.As expected, the charges focused on backdating stock options by doctoring employment documents, neglecting to record the stock-option expense on the company’s books, and misleading investors. Reyes, right, walks to federal court with his wife Penny in San Francisco, Wednesday, Jan. Reyes, the former chief executive of Brocade Communications Systems Inc., was sentenced... Former Brocade CEO Gregory Reyes was found guilty in August of 10 fraud and conspiracy charges. The former honcho faced up to 20 years in jail, the notes, but the penalty fell when the judge deemed that the company lost no money in the scheme.The judge, however, noted today that “Reyes acted with the intent to mislead the court.” Sixteen other execs have acknowledged backdating stock options since Reyes was first charged.Last March Reyes was already convicted of frauds and false statements but the jury acquitted him of a conspiracy charge.Stephanie Jensen, former Brocade's executive in charge of human resources, was also involved in this operation of illegal backdating and sentenced in 2008 during a separate trial. In another meeting, we were surprised to see him losing his temper after a [tough] question.There is no statute that explicitly outlaws backdating stock-option grants, but it seems virtually impossible to backdate options and achieve the ultimate goal of putting grants “in the money” without first deliberately falsifying documents and then covering up the sham.At least that seems to be the conclusion reached by the Department of Justice and the Securities and Exchange Commission regarding their first case against executives charged with fraud related to backdating.
Some executives have, well, at least when it comes to their stock options.
The cascading litany of alleged charges is not likely to stop with the Brocade case.
Indeed, with more than 80 companies being reviewed by the SEC for potential illegal backdating practices, and one academic study claiming that more than 2,000 companies have engaged in the practice, civil and criminal charges will probably mushroom in the next few months. The purpose of backdating is straightforward: it gives options holders an immediate paper gain, and a real gain once the option is exercised.
A stock option granted, for example, on the day you join the company allows you the right to buy that share at that day's price, but not until a fixed period – say a year – has elapsed.
If the price has risen in that time you can buy the share at the option price, sell it and pocket the profit.