Backdating case: a conspiracy?

Ex-executive says she didn't know law was violated

Stephanie Jensen, former human resources chief at Brocade Communications Systems, faces up to 20 years in prison and $5 million in fines if convicted of falsifying records. (Paul Sakuma/Associated Press/File 2006)

SAN FRANCISCO - The former human resources chief for Brocade Communications Systems Inc. conspired to falsify records to cover up backdating of employee stock-option grants, prosecutors told a federal jury yesterday.

Stephanie Jensen "routinely schemed with her boss," former chief executive Gregory Reyes, to falsify board meeting minutes to hide from auditors the practice of granting backdated options to new employees, an assistant US attorney, Adam Reeves, said in opening arguments. While Reyes bears a "heavy responsibility" for the scheme, Jensen falsified documents he signed, Reeves said. "She was the key person who ensured the details of this fraud were carried out," Reeves told the jurors.

Jensen was indicted with Reyes in August 2006 on charges of securities fraud and seven other counts. Prosecutors dropped all charges except conspiracy and falsifying books and records.

Her trial began three months after Reyes was found guilty of conspiracy, securities fraud, and other charges, making him the first CEO convicted by a jury in a broad US crackdown on options backdating.

Jensen learned Brocade's stock-option practices from Reyes and the company's finance chief, who taught her the process of choosing grant dates for stock options and preparing documents about them weeks and sometimes months later, said Jan Little, Jensen's attorney.

"She never for one second thought those documents were wrong or illegal," Little said.

Stock options allow holders to buy shares later, usually at the trading price on the day the options were granted. Through backdating, companies retroactively change grant dates to those with lower stock prices, giving recipients built-in profits. Unless disclosed and recorded as expenses, the practice is illegal because it hides costs from shareholders and regulators.

At least 200 companies have disclosed internal or federal investigations into stock-options backdating, and 100 have announced they must restate previously reported financial results to account for the practice. More than 90 executives and directors have left their jobs in connection with the practice, according to Bloomberg data.

Jensen falsified documents in 2001, 2002, and 2003, prosecutors said. She faces as long as 20 years in prison and $5 million in fines if convicted of falsifying records.

Brocade restated results in January 2005, widening its 2004 loss to $32 million from $2 million. The company restated results again in November 2005, adding about $71 million in expenses it didn't properly record for options.