A RARE OPTION OPTIONS BACKDATING CASE BASED ON NEGLIGENCE
The Commission settled another in a series of actions arising out of the option backdating practices at Brocade Communications Systems, Inc. SEC v. Byrd, Case No. C 07-4223 (N.D. Cal. Filed Aug. 17, 2007). The initial cases involving Brocade Communications were, of course, announced unveiled at the beginning of the option backdating litigation at a joint press conference by the SEC and the U.S. Attorney’s Office for the Northern District of California. SEC v. Reyes, Civil Action No. C-06-4435 (N.D. Cal. July 20, 2006)(discussed here); U.S. v. Reyes, Case No. C01-04435 (N.D. Cal.) (discussed here).
The settlement last week was with Michael Byrd, the former CFO and later COO and President of Brocade. Mr. Byrd was hired by Gregory Reyes in May 1999 as the CFO of the company and quickly promoted. The Commission’s complaint alleges that Mr. Byrd violated Securities Act Section 17(a) and Exchange Act Section 10(b), as well as various reporting provisions. Essentially, the complaint claims that Mr. Byrd obtained information suggesting that Mr. Reyes was improperly backdating stock options and later that he was involved in the process.
In settling with Mr. Byrd, the scienter based fraud claims were dropped. Rather, the settlement was based on Mr. Byrd’s consent to the entry of a permanent injunction prohibiting future violations of Securities Act Section 17(a)(2) & (3) and Exchange Act Sections 13(b)(5) and 16(a) as well as the pertinent rules. In addition, Mr. Byrd agreed to pay a fine of $175,000 and disgorgement and prejudgment interest of $249,843. The Release does not indicate that Mr. Byrd agreed to be barred from practice before the Commission under Rule 102(e). See also Litig. Rel. 21412 (Feb. 12, 2010).
The action against Mr. Byrd is one of the few option backdating cases settled based on a negligence theory. It is, however, the second such settlement relating to Brocade Communications. Mr. Byrd’s successor as CFO also settled an action with the Commission based on a negligence theory. Antonio Canova, CFO and vice president of finance for the company from May 2001 to December 2005 was one of three individuals named in the original action arising out of the practices at Brocade, discussed here. SEC v. Reyes, Case No. C-06-4435 (N.D. Cal. July 20, 2006). In that case each of the three defendants was charges with violations of Sections 17(a) and 10(b) among others. In settling with Mr. Canova, the Commission agreed to drop the scienter based fraud claims and accept an injunction which prohibited future violations of Securities Act Sections 17(a)(2)&(3) among others. Mr. Canova also agreed to pay a fine of $120,000 and disgorgement of about $249,000. As in the case against, Mr. Byrd, there was no indication in the release that Mr. Canova agreed to resolve an action based on Rule 102(e).
The other two defendants in the Reyes case were prosecuted criminally. Ms. Jensen has been convicted. Mr. Reyes is awaiting retrial after having his conviction reversed by the court of appeals as discussed here. The company previously settled with the Commission. SEC v. Brocade Communications Systems, Inc., Case No. 07-2821 (N.D. Cal. May 31, 2007) (discussed here). There are also settlements in a class action and derivative suit. In re Brocade Communications Sec. Litig. , No. 05-cv-2042 (N.D. Cal) (discussed here); In re Brocade Communications Systems, Inc. Derivative Litig., Case No. 05-2233 (N.D. Cal) (discussed here).