SEC, prosecutors file stock-option charges

Marketplace Staff Jul 20, 2006

TEXT OF INTERVIEW

KAI RYSSDAL: Brocade Communications is a Silicon Valley company you’ve probably never heard of. It does data storage, but Brocade has become exhibit A in the latest corporate scandal. Companies backdating stock options to give top executives an easy windfall. The Securities and Exchange Commission filed civil charges against former Brocade CEO Gregory Reyes today. Federal prosecutors chimed in with accusations of criminal fraud. Marketplace’s Washington bureau chief John Dimsdale has been following the story. Hi John.

JOHN DIMSDALE: Hello Kai.

RYSSDAL: What exactly now has Mr. Reyes been charged with?

DIMSDALE: Well he, with the help of two others — the former chief financial officer and the former vice president — are charged with manipulating millions of dollars worth of stock options that were offered to various employees over a four-year span. In effect, the options were priced at a date when the stock was cheaper and that gives the employees a windfall. By changing the dates, the feds say these executives were basically looting the company, hiding it from shareholders and lining executive pockets.

RYSSDAL: This is not the first time that we’ve heard about the possibility of these indictments and about this whole investigation. But I guess the question is, doesn’t it go back farther than that?

DIMSDALE: There was a recent study that showed that more than 2,000 companies have done this in some form or another. It was pretty routine by startup technology companies back in the ’90s when they had little profits and no cash. They’d make offers to workers, you know, we’ll let you buy this cheap stock with the prospect that the stock’s going to take once the business gets going. And that’s fine until the companies saw the benefits of manipulating the dates and not reporting it to stockholders or to the IRS.

RYSSDAL: What do you think the prospects are that other companies besides Brocade and Mr. Reyes will face some charges over this?

DIMSDALE: The SEC chairman said today that there is a hit list of some 80 companies, many of them high-tech startups. There are so many companies accused of this that the speculation is the government will try to make an example of a few in the hopes that companies will stop doing it, A, and then come forward voluntarily and then straighten out their own books.

RYSSDAL: Mr. Reyes I imagine denies any wrongdoing?

DIMSDALE: His lawyer put out a statement claiming his innocence. He says Reyes himself never personally benefited from any of the options that were misdated. The lawyer says without any personal financial gain how could Reyes be guilty of any crime. And you know there is a debate over whether changing the dates is against the law. Hiding the change seems to be clearly a violation, especially if you hide it from the IRS. But if a company wants to boost the rewards for hardworking employees who join a company that has little cash and only promises, then option backdating to a lower stock price could be considered a valuable business tool to attract more talented workers. Obviously the feds think differently.

RYSSDAL: Alright, Marketplace’s Washington bureau chief John Dimsdale. Thank you John.

DIMSDALE: Thank you Kai.

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