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The (First) Big One

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Posted by: Jack Ciesielski	7/21/2006 8:01 AM
No need to wonder any longer. And no need to mix up "Brocade" with "Broadcom." Get it straight: Brocade Communications is the first company to face civil and criminal charges. The former CEO/president/chairman, Gregory Reyes, the former VP-Human Resources, Stephanie Jensen and former CFO, have all been named in separate suits brought by the US Attorney's office and the SEC. Being the first case brought regarding backdating, you'd expect it to be the strongest case that could be presented out of the passel of companies under investigation - and it probably is. "Probably" because we don't know what's been uncovered in the other investigations - but from the looks of the SEC's complaint, this one has all the ingredients of a good hand for the prosecution. CEO Reyes acted as a one-man compensation committee; he enlisted Jensen's help in backdating option documents (and she understood the implications); Reyes benefitted personally from the options backdating scheme. The firm issued misleading financial statements that investors relied upon. When the firm made a restatement of results in January 2005, the 2004 results showed an increase in net loss from $2 million to $32 million. The 2003 net loss increased from $136 million to $147 million, but the 2002 net income increased by $60 million to $126 million. For the period between 1999 to 2001, cumulative income declined by a total of $304 million. During the period, CEO Reyes and CFO Canova knew the statements were misleading, yet represented to the auditors that they'd provided them with factually correct, non-fraudulent information for the audits and also signed off on the certifications of the 2002 and 2003 10-K annual reports. There doesn't seem to be a lot of gray area here, though I'm sure the defendants' counsel will devise some. You've got a case involving long-established accounting principles and blatant document-doctoring to make the transactions support the accounting result that was desired. There was personal gain, and there were outright lies to investors through the financial statements. The only question is: what about the activity like this that may have been occurring in companies that haven't been investigated?

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