Brocade: We're Clean

3:45 PM -- Greg Reyes, Stephanie Jensen, and Tony Canova will get their chance in criminal or civil court to prove their innocence in the options backdating scandal. (See Reyes Charged With Fraud.) Meanwhile, their old company must make its case in the court of public opinion.

Brocade is trying its best to distance itself from its former CEO and other executives accused by the Justice Department and SEC of fraudulent practices. A statement released by the company Thursday pointed out that no current Brocade employees were named. Further, the statement says the firm has cleaned up its books by restating earnings and is willing to pay at least $7 million to settle with the SEC.

According to the statement: "Brocade has taken a number of steps to strengthen disclosure controls and procedures, and internal control over financial reporting, including personnel and executive changes and procedural changes to improve the stock option granting and employee change in status processes."

Former human resources VP Jensen left Brocade in 2004. Reyes was sent packing as CEO in January of 2005 and then dumped as a consultant four months later. Canova stepped down as CFO in December. See Brocade Switches CEOs, Restates , and Brocade CFO Resigns.)

"Its all in the past," says one Wall Street analyst who gives Brocade the benefit of the doubt. "Reyes was an arrogant sales guy and was hated by Wall Street. But those who were involved are gone now. They have cleaned their books, restated earnings, and are close to an SEC settlement. As far as we know, the current management team is clean."Another analyst is less certain that the worst is behind Brocade.

"These issues are old news, but [the] announcement could re-open some old scars," A.G. Edwards analyst Aaron Rakers wrote in an email to clients. "On the other hand, given a new executive management team, this announcement could be viewed as the beginning of the final chapter of this saga."

It won't be easy for Brocade to put the scandal behind it. There have already been civil suits filed against the company by shareholders alleging it issued misleading financial statements. (See Brocade Hit With Class Action Suit.)

What's more, the taint of being involved in the stock options scandal could be hard to shake. You can be sure Cisco and McData will remind potential customers about it as often as possible.

The depth of the investigation that snared Brocade could end up saving it, though. The SEC says it is investigating more than 80 companies for backdating options. (See Vendor Options Draw SEC Scrutiny.) Scores of criminal cases, fines, and lawsuits could spare Brocade the pain of being the lone poster boy for backdated options. Still, the company will always be the first to have a former exec accused.As for Reyes, no matter what his ultimate courtroom fate, it's unlikely that he'll ever run another company. But don't count him out completely. It always helps to have connections, and he has plenty. His father Gregorio sits on the board of LSI Logic, Seagate, and other companies, and his uncle George is the CFO of Google. Greg Reyes still sits on the board of VeriSign and is a major investor in soon-to-go-public backup software vendor CommVault.

Dave Raffo, Senior Editor, Byte and Switch