The US Securities and Exchange Commission has filed civil fraud charges against former Brocade COO and president Michael Byrd, alleging he knew about fraudulent stock options backdating but did nothing about it.
If people feared that the recent criminal fraud conviction of former Brocade CEO Gregory Reyes would lead to more SEC backdating prosecutions, those fears were evidently well-founded.
This case confirms the Commission’s commitment to pursuing not just those who perpetrate financial fraud, but the corporate gatekeepers who allow it to happen on their watch, Linda Chatman Thomsen, the SEC’s director of enforcement, said in a statement.
The SEC claims Byrd broke securities law by knowingly signing off on manipulated accounting until he left the company in 2003.
Byrd allowed Brocade to represent to shareholders that the Company did not incur expenses for stock options issued to employees, including executives, the SEC’s complaint alleges.
As a result, Reyes’ stock option manipulation continued unabated and Brocade reported materially understated expenses, overstated its income, and falsely represented in certain Commission filings that the Company had incurred no costs for options grants, it says.
Almost two weeks ago, Reyes was convicted by a jury on 10 counts of securities fraud. Reyes had coordinated an effort to grant backdated in-the-money stock options to executives, and then to fraudulently account for those grants, the jury decided after a week of deliberations.
It was the first fraud case brought against an executive related to options backdating, a fairly esoteric accounting issue that some say isn’t really that terrible an offense. As such it was considered a test-case.
The case against Byrd concerns his role as first CFO and then president and COO, between 1999 and 2003.
The SEC says Byrd invented a part-time program that paid new hires for four hours a week before they actually started working for Brocade, in order that they could then benefit from in-the-money options granted at lower market prices, without recording expenses.
Many allegations, which the SEC backs up with quotes from emails between Byrd, Reyes and other employees, appear to involve Byrd’s failing to rein in his CEO’s antics when it came to offering lucrative stock package to new hires.
Byrd, as CFO and then COO, had an ongoing responsibility to ensure the accuracy of financial reports filed with the SEC and with auditors, the SEC said. He signed off several reports that he knew to be false, according to the complaint.
Unlike Reyes, Byrd directly benefited financially from backdated options, according to the SEC complaint. The SEC says Byrd was granted 800,000 options backdated several weeks so they could have a strike price of $20.70. A few weeks later, Brocade shares were trading at $40.
While Reyes faces large fines and possible jail time if appeals against his conviction are unsuccessful, the SEC’s civil case against Byrd could not result in jail time, only monetary penalties.