Some analysts have said the SEC is very unlikely to reverse the process that has already seen it move towards a settlement with McData, based on a proposed $7m fine. Trading in Brocade’s stock was relatively quiet on Friday, and on a day when tech stocks were depressed by Dell’s disappointing results Brocade’s share price fell by only 4%.
But the strength of the action that the SEC and the US Department of Justice have taken against three former Brocade chiefs has made others say that Brocade may be back on the hook.
On Thursday the SEC and the DoJ simultaneously launched civil and criminal charges against Brocade’s former CEO Greg Reyes, and its former CFO and vice president of HR, alleging fraud via stock option back-dating. Reyes’ lawyer has already issued a statement insisting that his client is innocent.
Kaufman Bros LP analyst Shebly Seyrafi said in a research note issued on Friday: We are concerned that, with the charges levied against Mr Reyes, the odds have increased that charges will be brought against Brocade itself.
Seyrafi said that this statement was based on the strength of the action taken against Reyes and his former colleagues, the presence of the DoJ as a second body investigating the alleged fraud, and a potential US government desire to make an example of somebody or some corporation.
But all of those factors have been either in play or widely expected for many months. What is not known is whether the DoJ or the SEC have found any new evidence of fraudulent behavior since earlier this year when the SEC made its tentative settlement with Brocade.
In May Brocade said it had put aside $7m to cover an SEC fine related to its past stock option handling, and said that SEC staff had passed this proposed settlement up to the SEC Commissioners for approval. No formal confirmation of a settlement has been made yet.
Earlier in the year, Brocade had talked of a $5m settlement. It’s a fluid situation. As the SEC digs deeper, who knows whether they’ll find out about more acts that Brocade could have prevented, said Aaron Rakers, analyst at AG Edwards.
Unfortunately for Brocade, there is always a fear of the unknown, Rakers said.
Early last year Brocade became one of the very first companies to be investigated for stock option fraud. The many other IT companies that have since come under some form of SEC investigation or enquiry into past handling of stock options include Applied Micro Circuits, Broadcom, outsourcers ACS and CSC, Foundry Networks, Intuit, McAfee, and RSA Security. Among the companies that have announced internal enquires are Apple Computer and CA.
