Greg Reyes, Brocade Communications Systems, Inc.’s (“Brocade”) indicted ex-CEO, has offered a novel argument as to why he should not be thrown into the slammer for systematically falsifying company records for over four years. Reyes faces both criminal and civil charges from the SEC for his role in the company’s option backdating scheme. Both Reyes and Brocade’s former human resources chief, Stephanie Jensen (along with the company’s ex-CFO), are charged with consistently backdating options for employees and new hires from 2000 through 2004. According to the SEC, in order to accomplish this scheme, the company’s board minutes, job offer letters, and other employment documents were falsified.
Reyes, and his attorneys, now argue that this systematic fraud was “immaterial” because the backdating scheme only impacted the company’s reporting of non-cash expenses, which are generally ignored by analysts and investors. According to Reyes, analysts covering tech stocks such as Brocade purposefully exclude non-cash expenses from their reports because they tend to obscure the true operating performance of a company. As a result, any fraud impacting the reporting of these expenses are by definition “immaterial”.
Without commenting on the significance of non-cash expenses to an investment decision, a more pressing issue comes to mind. Isn’t the fact that a company’s senior management falsified numerous company records over the course of four years “material” to the investment community? Is the integrity, or complete lack thereof, of a Company’s CEO and CFO of any consequence to a prospective investor?
Reyes, and his defense team, have answered these questions in the negative. Hopefully, this shameless attitude to such overt fraud will not go unnoticed by the court.
To read more about Reyes’ “novel” defense, click here.
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