Brocade's Ex-C.F.O. Accused of Fraud

Before during and after his fraud trial, Brocade C.E.O. Gregory Reyes sought to defend himself against fraud charges by saying he had relied on his chief financial officer for advice about backdating stock options.

Since Reyes was convicted earlier this month, it's not too surprising that federal regulators today filed civil fraud charges against his finance chief, Michael J. Byrd, too.

In the complaint, the Securities and Exchange Commission alleged that Byrd knew Reyes and others were backdating options, but that he "failed to ensure that the company properly accounted for the option expenses and disclosed them to investors."

The S.E.C. said that after he was hired in 1999, Byrd learned that Reyes repeatedly fudged records about the dates on which he awarded stock options to new executives.

The goal was to virtually guarantee the employees a profit, even though the options were intended to motivate them to work hard for a gain.

In some cases, federal officials said, Reyes claimed he had awarded options to people before the people had even joined the company.

The complaint goes on to allege that Byrd knew of this manipulation, and knew that it would cost Brocade money when the options were exercised.

But, regulators said, Byrd issued financial statements that falsely claimed stock options issued to employees were not an expense for the company.

As a result, the S.E.C. said, Brocade materially understated its expenses, overstated its income, and falsely represented that the company had incurred no costs for options grants.

by Mark Stein