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| At the high-tech company Brocade Communications Systems Inc., employees received an unusual request from human-resources managers in 2002: Alter the employment records of several executives to make it seem they joined the company later than they really did. The reason for this strange request was to give their stock options more value. The executives had received options when they joined. But with the tech bubble then fast deflating, Brocade's stock price had fallen below the price at which the options could be exercised. With a change in start date, the options could be replaced with some that carried a later date when the price was lower. That would enhance their value, since options give recipients the right to buy shares at the stock's price when they're granted. This episode, related by two former employees, is part of a detailed picture of what went on inside one company caught up in the stock-options scandal. The events at Brocade, according to nine former employees and to company documents, involved not only altered start dates but a one-man options committee and a technique for influencing options grant dates through part-time employment. |
It's a pattern of options practices that has drawn the attention of federal prosecutors. They are considering bringing criminal charges against a former Brocade chief executive, Gregory L. Reyes, says a person familiar with the situation -- in what would be the first criminal case in the spiraling scandal over the timing of options. The Securities and Exchange Commission also is considering civil charges in the matter, according to people familiar with the SEC probe. Mr. Reyes denies any wrongdoing. So long as Brocade's stock was on the rise, employees wanted their options to be dated sooner, not later, since an earlier date would carry a lower exercise price. So to make it seem that employees had begun their careers at Brocade sooner, ex-employees say, the company would offer them temporary part-time employment from the moment they agreed to join, but before they actually did. Several former employees described the offer to work part-time as a charade: Few actually worked any hours prior to starting full-time, other than making a few phone calls. New recruits were told, "We want you to start part-time -- wink-wink, nod-nod," says one former employee. "This was not a secret. Everybody knew about it." |
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