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Ex-directors arrested on back-dating charges
[August 07, 2006]

Ex-directors arrested on back-dating charges

(Microscope Via Thomson Dialog NewsEdge)
With the storage industry increasingly driven by compliance and regulation issues as a sales tool, SAN-switch vendor Brocade suffered humiliation after its former chief executive and financial director were charged by the US Securities and Exchange Commission (SEC) over a stock option back-dating scheme.

Criminal complaints against Gregory Reyes and Antonio Canova over the manipulation of stock option grants led to a series of result restatements including net loss increases of $30m (?16m) in 2004 and $9m in 2003 with total income declining by $304m between 1999 and 2001. Reyes was CEO from 1998 until January 2005.

The SEC's enforcement division stated that Reyes and Jensen knew "investors would be given a false portrait of Brocade's financial condition". Both appeared in court last week under the charge of securities fraud.

Brocade stated it "had no comment with respect to the former executive officers" but added that none of the charges affected its "historical revenues, cash positions, or non-stock option related operating expenses".

"Brocade has taken a number of steps to strengthen disclosure controls and procedures, and internal control over financial reporting, including personnel and executive changes and procedural changes to improve the stock option granting and employee change in status processes," the vendor insisted in a statement.

But during the restatement period Brocade has endeavoured to keep ahead of challenges from close rival McData and the entry of Cisco into the SAN switch market.

Speaking to MicroScope earlier this year Paul Phillips, UK manager at Brocade, said that while it was difficult to gain points of market share it had "the right strategy" to push it (see MicroScope, 18 April). According to research group Dell'Oro, Brocade held a 47 per cent revenue share of the SAN switch market during 2005 compared to the 17 per cent share Cisco has managed since entering the market in 2003.

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