When federal prosecutors and the Securities and Exchange Commission filed the first charge from the burgeoning options-timing investigations against former Brocade Communications CEO Gregory Reyes and human resources VP Stephanie Jensen on July 20, they labeled the conduct as “securities fraud.” This is probably the most serious moniker that can be applied to corporate misconduct, calling forth notions of Ponzi schemes that prey on naive investors and accounting violations designed to make rotten companies look healthy. The charge has been the central feature in the recent convictions of former CEOs at WorldCom and Enron, so it is an easy conclusion to draw: CEO deception at a public company must mean securities fraud.

But was what the government alleges occurred at Brocade Communications really securities fraud? The government asserts that the defendants violated �10(b) of the Securities Exchange Act, which prohibits any person from using “any manipulative or deceptive device or contrivance” in connection with the purchase or sale of a security. This antifraud prohibition is used routinely in cases ranging from penny stock scams to financial chicanery at Fortune 500 companies. Supreme Court Justice Lewis F. Powell Jr. once said that “Section 10(b) is aptly described as a catchall provision, but what it catches must be fraud.” Chiarella v. United States, 445 U.S. 222, 234-235 (1980).

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