August 12, 2006
Brocade Executives Indicted
As expected, a grand jury indicted former Brocade Communications CEO Gregory Reyes and former human resources VP Stephanie Jensen, supplanting the securities fraud complaint issued on July 20. Reyes is indicted on twelve charges and Jensen on eight, comprised of conspiracy, securities fraud, mail fraud, false entries in the company's books, and four counts of making false statements to the company's accountants (Reyes is the only defendant on these). The factual allegations in the indictment (available below) do not vary much from the earlier complaint, and the securities fraud charges under Section 10(b) and Rule 10b-5 simply recite the language of those provisions and allege both a scheme to defraud and causing Brocade to file false Form 10-Ks with the SEC. The mail fraud charge alleges both the traditional money/property form of fraud and also an alleged deprivation of the right of honest services owed to Brocade by both defendants. Once again, the issue of intent will be the key to the fraud charges because neither Reyes nor Jensen profited directly from the backdating of the options grants and they were authorized to issue the options to the new hires, albeit without falsifying records. Each is charged with a narrower books-and-records violation, which may be easier for prosecutors to establish.
One thing I noticed in the indictment is that it is dated "July 20, 2006" on the last page where the foreman signed it as a "True Bill," although it was not filed until August 10. I had wondered why prosecutors used a criminal complaint earlier rather than a grand jury indictment, which would have obviated the need for a hearing on the propriety of the complaint that was held before a magistrate on August 9. A complaint is judged by a different standard than a grand jury indictment, although the threshold for an acceptable complaint is still rather low. I suspect that the prosecutors hoped to have the grand jury return the indictment on Thursday, July 20, but for whatever reason it could not be completed in time. Rather than let the moment pass, they filed the complaint and now, three weeks later -- this is obviously a "Thursday" grand jury, and could even be the same one that is hearing the Barry Bonds perjury investigation -- the indictment was ready for a vote. A previously scheduled preliminary hearing to review the basis for the securities fraud charge in the complaint is now out the window because a grand jury indictment is based on probable cause, so the case will proceed from here into the discovery phase. Look for the defense to file a motion to dismiss and for a bill of particulars to get the government to identify the victim(s) of the alleged violations and its basis for inferring criminal intent, among other things. (ph)
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