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Internal strife at the Securities and Exchange Commission tanked a proposed settlement between the SEC and Michael Byrd, the former CFO of Brocade Communications. Upset that a million-dollar deal proposed by the Commission’s enforcement division wouldn’t have barred Byrd from being an accountant at other public companies, the SEC’s accounting division effectively scuttled the agreement, said lawyers briefed on the case. Byrd was a key figure in the criminal trial that ended with a conviction last month of former Brocade CEO Gregory Reyes for backdating stock options. It was the first options prosecution to go to trial. On Friday, the commission filed a civil suit against Byrd that said he failed to stop options practices such as manipulating employees’ start dates that were intended to conceal a pattern of giving employees backdated � and therefore discounted � option awards. “Byrd therefore knew, or was reckless in not knowing, that Brocade’s financial statements and the company’s disclosures to shareholders were rendered materially false and misleading,” the SEC complaint says. The suit came as a surprise to many involved in the Brocade case because Byrd had been working for months on a settlement with the SEC. Several people with knowledge of the discussions said Byrd’s deal was widely assumed to involve a heavy fine but no prohibition from serving as an accountant at other public companies. That, said people briefed on the case, was the deal-breaker. Byrd had solidified the terms with the SEC’s enforcement department, but the commission’s accountants wouldn’t accept any deal that didn’t include a lifetime ban on Byrd serving as an accountant at other public corporations. Neither Byrd nor the accountants would budge. Byrd’s predicament is also surprising because he had cooperated with SEC and Department of Justice lawyers almost from the beginning of the Reyes case, answering questions under temporary immunity during the investigation, although he never took the stand. Thus Byrd was a specter present throughout the trial. Richard Marmaro, a partner at Skadden, Arps, Slate, Meagher & Flom, repeatedly accused Byrd of masterminding the options scheme, and pointed out that Byrd had previously worked at Maxim Integrated Products, which also had a history of options improprieties. Backdating an employee’s options to a more advantageous date increases the value of the award, but by law must be accounted for on the company’s balance sheet. Brocade gained attention when the SEC charged Reyes, former HR director Stephanie Jensen and ex-CFO Antonio Canova with securities fraud last year. Only Reyes and Jensen face criminal charges. (Jensen is awaiting trial.) After Marmaro criticized prosecutors for not putting Byrd on the stand, he asked the jury in closing arguments to consider what Byrd would have said had he testified. Marmaro wouldn’t comment Friday, but in a motion for a new trial that Marmaro filed last week, he says that prosecutors knowingly misstated Byrd’s role in granting options to employee Richard Geruson.
Optional Reading

Read The Recorder‘s roundup of the stock-option backdating scandal. There won’t be a test later … but there might be a subpoena.

“The prosecution misled the jury” by saying that Reyes had fooled Byrd, Marmaro wrote. “As the prosecution knew,” he added, “defense counsel’s argument � that Mr. Byrd knew all about the Geruson look-back � was exactly right.” In its complaint, the SEC says Byrd knew Geruson’s options were dated to October 2001 when he didn’t actually start work at the company until 2002. “As Byrd was aware, Geruson did not begin work at Brocade � part-time or otherwise � until February 2002,” the complaint says. “Byrd also did not reveal this discrepancy to the company’s external auditors.” The SEC also says Byrd received backdated options for 800,000 shares of stock. In a phone interview Friday, Susan Fleischmann, the lead SEC lawyer on the case, and the San Francisco office’s enforcement chief, Marc Fagel, said the complaint is based on information � and witnesses � the defense had access to. “There’s no evidence that’s referred to in our complaint that wasn’t available to the defense,” Fagel said. “How they chose to put on their defense was what they chose to do,” Fleischmann added. But Byrd’s lawyer, John Potter of Quinn Emanuel Urquhart Oliver & Hedges was nonplussed Friday. In a prepared statement, he said the SEC complaint stood in contrast to the successful Reyes prosecution. “As the lead prosecutor correctly observed in closing argument, there was absolutely no evidence suggesting that Mr. Byrd had any awareness of the option practices at issue,” he wrote, adding that “the SEC’s complaint against Mr. Byrd advances a radically different theory, one completely at variance with the voluminous evidence presented during the recent Reyes trial.”

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