Non-Feasance Leads SEC to Charge Former CFO and COO of Brocade for Illegal Backdating of Stock Options

In a new twist to the SEC’s options backdating enforcement policy, the Securities and Exchange Commission filed fraud charges against Michael J. Byrd, a former Chief Financial Officer and Chief Operating Officer of Brocade Communications Systems, Inc., alleging that “he disregarded indications that other senior corporate executives were improperly backdating stock option grants at the company.” The Commission alleges Byrd “learned of instances in which Brocade’s then-CEO and others were backdating options for certain individuals, yet failed to ensure that the company properly accounted for the option expenses and disclosed them to investors.”

This latest action could indicate a shift in the SEC’s enforcement policy.  By filing charges against an executive with oversight duties who failed to act, the SEC has  broadened its enforcement net to include executives who were on notice of improper conduct and failed to take “appropriate action.” The case should serve as a disincentive for executives to “turn the other cheek” and give more vigor to corporate compliance programs.

Here is a copy of the Complaint filed against Michael J. Byrd in the U.S. District Court for the Northern District of California, San Francisco Division.

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