Thursday, May 31, 2007

SEC Settles with Brocade Over Options Backdating

The SEC settled a civil enforcement action with Brocade Communications Systems, Inc., over options backdating by the company's CEO, Gregory Reyes.  The case became the poster child for Chairman Christopher Cox's new procedure that requires the SEC staff to get authorization from the full Commission before negotiating a corporate penalty rather than presenting an agreed amount for approval.  This is part of Cox's plan to exert greater control over the Enforcement Division and to address the issue of what fines are appropriate when a company's shareholders bear the burden of the harm from the underlying securities fraud and then the company pays a fine on top of those losses.  In the Brocade settlement (SEC Litigation Release here and complaint here), the company agreed to pay a $7 million civil penalty, which now sets the benchmark for future cases that can be compared to the amount of options issued and the level of executive involvement.  Reyes and Brocade's former human resources director were indicted on conspiracy and securities fraud charged, and sued by the SEC, in July 2006, so this case is likely viewed as a fairly egregious one.  I suspect that future settlements of pure options backdating cases, i.e. ones that do not also involve accounting fraud aside from the misstated income and expenses due to the backdated options issuance, will likely come in at a lower amount absent significant personal gains by executives. (ph)

http://lawprofessors.typepad.com/whitecollarcrime_blog/2007/05/sec_settles_wit.html

Civil Enforcement, Fraud, Securities | Permalink

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Tracked on Jun 1, 2007 2:50:33 AM

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