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SEC Files First Charges in Stock-Option Dating Probe

JOHN YDSTIE, host:

The former Chief Executive Officer of Brocade Communications, Gregory Reyes, and two other executives have been charged with fraud. Officials say they concocted a scheme to backdate stock options that were handed out to new and existing employees so they'd be worth more money.

Yesterday's charges are the first to emerge from the backdating scandal which is said to involve dozens of U.S. companies.

NPR's Jim Zarroli reports.

JIM ZARROLI reporting:

Greg Reyes was a salesman who hit it big in Silicon Valley. By his late 30s he headed up the data storage company Brocade Communications. He was even named one of the 400 wealthiest Americans by Forbes Magazine, which estimated his worth at a billion dollars.

Now, at 43, Reyes has become the first casualty of the backdating scandal. U.S. officials say Reyes and former Vice President of Human Resources Stephanie Jensen handed out stock options to employees. They then allegedly forged documents to make it look like the options had been issued when the stock was low. That guaranteed that the recipient could make the biggest possible profit.

Linda Thompson is head of Enforcement at the Securities and Exchange Commission.

Ms. LINDA THOMPSON (Head of Enforcement, Securities and Exchange Commission): The scheme was blatant. Mr. Reyes granted options to individuals on a date weeks or even months before they had been hired, including to people that Mr. Reyes was personally actively recruiting.

ZARROLI: Reyes and Jensen face criminal fraud charges. They also face a civil suit, as does former Chief Financial Officer Antonio Canova. The charges mark the opening of what promises to be an important new chapter in the annals of corporate wrongdoing. The practice of backdating options appears to have been widespread in recent years. U.S. officials said yesterday that they are investigating dozens of other companies for the same offense.

At Brocade, they say the crime went further. Not only were options backdated, they say, but executives took steps to conceal it from shareholders and auditors, even changing the minutes of board meetings.

Patrick McGurn is head of Institutional Shareholder Services.

Mr. PATRICK MCGURN (Executive Vice President, Institutional Shareholder Services): I think that the backdating activity itself was seedy, unethical perhaps, I think not good from a shareholder perspective. But in most instances it probably wasn't illegal until they started lying about it via the company's filings to the investment community and to the marketplace.

ZARROLI: Both Reyes and Jensen denied the government's charges. Jensen's attorney called them completely wrong-headed. Reyes' attorney issued a statement as soon as the charges were announced noting that his client had not himself profited from backdating. He said, financial gain is always the motive in securities fraud cases, and here there was none.

U.S. officials replied that by concealing the true cost of options to shareholders, the defendants had misstated Brocade's financial condition. SEC Chairman Christopher Cox said allowing that to go unpunished would undermine the markets and the economy.

Mr. CHRISTOPHER COX (Chairman, Securities and Exchange Commission): Options backdating strikes at the heart of investor confidence in our capital markets. It deceives investors, and the market as a whole, about the financial health of companies that cheat in this way. In many cases it makes a hash of the financial statements. It is poisonous to an efficient marketplace.

ZARROLI: Cox said the government is prepared to vigorously prosecute backdating cases and he suggested that yesterday's indictments could be followed by others.

Jim Zarroli, NPR News, New York.

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YDSTIE: This is NPR News. Transcript provided by NPR, Copyright NPR.

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Jim Zarroli is an NPR correspondent based in New York. He covers economics and business news.