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Brocade CEO case could be dismissed

From Times Staff and Wire Reports

A U.S. judge left up in the air Thursday whether he would dismiss fraud charges against former Brocade Communications Systems Inc. Chief Executive Gregory Reyes -- the first CEO prosecuted in a stock option backdating case.

U.S. District Judge Charles Breyer in San Francisco said he may even wait to decide until after the jury in the case returns a verdict. Court rules allow judges to consider dismissal while a trial proceeds or to dismiss cases after a jury renders a verdict, he said.

The trial, which was on hold this week, resumes Monday. The jury could begin deliberating as early as Thursday.

“I’m not indicating when I will decide,” Breyer said at a hearing.

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A dismissal of the case would be a blow to the government in prosecuting cases of option backdating, a practice that became widespread among technology firms in the late 1990s and the early part of this decade.

In a backdating arrangement, companies retroactively change the grant date of stock options to a day with a low stock price, giving option recipients built-in profits. The government says the practice is illegal if it isn’t disclosed to shareholders.

Reyes, 44, faces 10 charges including fraud and falsifying board minutes to inflate San Jose-based Brocade’s financial results.

But Breyer has questioned whether prosecutors proved Reyes understood accounting rules requiring companies to subtract stock option grant expenses from financial results if awards were backdated.

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In separate developments in the option backdating scandal:

* Michael Shanahan, the ex-chairman of defense contractor Engineered Support Systems Inc., his son Michael and another man were indicted by a St. Louis grand jury on charges of fraud related to the backdating of company options.

James Martin, the attorney for Shanahan’s son, said, “We are intent on fighting this indictment.”

* Take Two Interactive Software Inc.'s former chief lawyer and ex-chief accounting officer have pleaded guilty to falsifying business records in connection with the company’s backdating of options, court records show.

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Former accounting officer Patti Tay, 31, pleaded guilty in New York state court in Manhattan to making false entries in 2001 and 2002 on a spreadsheet of stock option grants, according to court records. Former general counsel Kenneth Selterman, 52, pleaded guilty to providing false information in a March 2002 letter to regulators regarding options, prosecutors said.

“The investigation is still open,” said Manhattan Chief Assistant District Atty. James Kindler. “It’s important for the investing public to know what [option pay] executives in public companies are getting. If it’s not reported accurately, it is a fraud.”


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