Speech by SEC Chairman:
Remarks at Press Conference on Actions Against Brocade Communications Systems

by

Chairman Christopher Cox

U.S. Securities and Exchange Commission

San Francisco, California
July 20, 2006

Thank you, Linda. I’m Chris Cox, Chairman of the Securities and Exchange Commission. And as Linda mentioned, we are here today to announce that the United States Government is filing both civil and criminal charges in an options backdating scheme at Brocade Communications Systems.

Even though legal strictures prevent civil and criminal authorities from extensive coordination of our cases, we wanted to coordinate this announcement to show that the full weight of the Federal government is being put behind this effort to stamp out fraudulent stock option backdating.

Earlier today, the SEC filed its civil action in Federal District Court alleging fraudulent options reporting at Brocade. We allege that this scheme went on for more than four years. It resulted in the inflation of Brocade’s net income by as much as $1 billion in the year 2000 alone.

We are filing charges against three top Brocade executives: Gregory Reyes, Brocade’s former CEO, President and Chairman; Stephanie Jensen, the former Vice President of Human Resources; and Antonio Canova, the former Chief Financial Officer.

As you know, backdating refers to the practice of selecting a grant date for an option award that’s earlier than when the award is actually made. This issue is important because it goes to the heart of the relationship between a corporation and its shareholders. In order for our system of public ownership to work, the interests of shareholders, and not the personal interests of the company’s management or its directors, must be paramount. The proper use of options for compensation can be an important tool for companies that produces tangible benefits for shareholders. But options backdating strikes at the heart of investor confidence in our capital markets. It deceives investors and the market as a whole about the financial health of companies that cheat in this way. It understates a company’s compensation expenses and overstates the company’s income. In many cases, it makes a hash of the financial statements. It is poisonous to an efficient marketplace. The Securities and Exchange Commission is committed to bringing it to an end nationwide.

In this case, our complaint alleges these executives intentionally falsified stock option documents, including minutes of the compensation committee of the board of directors, to make it appear that options were granted at the market price on a date earlier than the date of the actual grant. When these stock option practices surfaced, Brocade was required to restate and revise its financial statements for six fiscal years, from 1999 through 2004.

Unfortunately, this case is not the only matter before the Securities and Exchange Commission involving the fraudulent reporting of stock option grants. The SEC’s Division of Enforcement, led by our energetic and dedicated Director Linda Thomsen, is currently investigating over 80 companies nationwide concerning possible fraudulent reporting of stock option grants. The investigations are being coordinated from our Washington, D.C., headquarters and are being carried out at our SEC offices nationwide. We expect these investigations to lead to additional enforcement actions in the coming weeks and months.

I’d like to congratulate Linda, Helane Morrison and her team here in San Francisco, and the entire Enforcement Division, on today’s actions.

Now, I’d like to introduce the United States Attorney for the Northern District of California, Kevin Ryan.

http://www.sec.gov/news/speech/spch072006cc.htm