First options cases brought

The SEC and the U.S. Attorney for the Northern District of California held a joint news conference today to announce the filing of the first enforcement actions based on the back dating of stock options. Following a year long investigation, the SEC filed civil fraud charges against three former officers of Brocade Communications – the former CEO, CFO and vice president of human resources. The U.S. Attorney’s office filed a single count criminal complaint alleging securities fraud against the former Brocade CEO and vice president of human resources.


Both cases are based several instances of backdating options and the claimed falsification of company records to conceal those actions from auditors, shareholders and the public. These actions turned the financial reporting of the company into “hash” according to SEC Chairman Cox. As a result Brocade has been required to restate its financial statements.


Criminal and civil investigations relating to the practice of backdating stock options are continuing. The SEC’s enforcement director noted that the agency has dozens of open investigations looking into the issue.

The backdating of stock options raises a number of complex issues as previously discussed in this blog. While not all such action violates the law as SEC Commissioner Paul Atkins made clear in his speech on July 6, 2006, the actions filed today, coupled with the complexity of the issues, makes it clear that every issuer should carefully review its practices surrounding the issuance of options.