A federal jury convicted Stephanie Jensen, the former head of human resources
at Brocade Communications, of two counts of criminal fraud on Thursday, December
6, for her role in the backdating scheme.
Prosecutors were able to win their convictions based on testimony and
evidence that showed Jensen knowingly committed wrongful acts, even though she
might not have known what specific laws she was breaking.
By this standard, officers of publicly traded companies don’t need to know or
understand securities law to break it—they just have to know, or expect that
reasonable people would believe, their behavior to be wrong.
“It wasn’t easy—you’re talking about someone’s life,” said juror Iris
Hoffman, 61, after the convictions were declared. “All I can say is that we
discussed each issue thoroughly; we really looked at both sides. I would have
been happy to have found a way, legally, not to have had to come to [this]
particular decision, but we had to follow the law.”
“It’s very scary,” said one observer in the courtroom last week. He asked not
be identified because of his relationship to some defendants in other, pending
backdating cases. “It opens the door to criminalizing a lot of behavior that
might only be human error: ‘Oh, I didn’t know that was against the law. Now I
won’t do it,’ ” he added.
In cases where a company remains intact, the observer added, “shouldn’t these
cases be handled [as] civil matters? This isn’t Enron.”
The government views such comments as armchair pundits splitting hairs. In a
contradiction of the public debate over backdating, this case always was “a
simple fraud,” said Assistant U.S. Attorney Adam A. Reeves, who, along with
Assistant U.S. Attorney Timothy P. Crudo, successfully prosecuted both Jensen
and former Brocade CEO (and Jensen’s former boss) Gregory L. Reyes. “Falsifying
records is always wrong, and in this case [the dates] came from the bottom
up.”
Originally charged with eight felonies, Jensen was ultimately tried and
convicted on two counts—criminal conspiracy to commit securities fraud and the
act of falsifying Brocade’s books and records—for her role in an illegal
employee compensation scheme that took place at the company between 2000 and
2004. In August, Reyes, the first executive ever to be criminally tried for
these offenses, was convicted of 10 felonies for his role in the same
matter.
Until now, stock option grants, and the complexities of recording and
accounting for them appropriately to regulators, have been assumed to be the
domain of a company’s finance, accounting or legal departments. (Reyes’ own
defense team made this argument in its effort to absolve the CEO of
responsibility for what his lawyers dubbed stock option “administrivia.”)
Certainly few people ever thought that an HR officer could be deemed responsible
for it.
But compensation paperwork, including employee offer letters and stock option
grant forms, were originated and administered by Brocade’s human resources
department—as they are at most public companies.
In a streamlined case that began November 26 and lasted only six days, the
government successfully convinced the jury that it was Jensen, as the head of
HR, who directed and supervised her staff as they doctored stock option grant
forms and meeting minutes of a special compensation committee of the board of
directors (made up only of Reyes), thus creating records of events that, in
fact, never took place.
Here especially, Crudo argued in his closing, blaming the scheme on Reyes, or
anyone else higher on the organizational chart, didn’t hold water because it was
Jensen who actually determined the dates on which Brocade’s shares were trading
at periodic lows—and it was Jensen who recommended to Reyes which of the dates
ought to be falsely applied to Brocade’s stock option grant minutes.
Perhaps in deference to the novelty of these trials, the judge in the case
delayed Reyes’ sentencing until the conclusion of Jensen’s trial. Last week,
Judge Stephen R. Breyer set Reyes’ sentencing hearing for December 19. He faces
up to 20 years each for nine of his convictions and five years for his own
conspiracy charge. The judge is widely expected to order a much shorter
sentence.
Jensen faces five years for conspiracy, but she may be able to avoid any
incarceration for the books and records violation. In a quirk of the law, while
she can be convicted merely for wrongful acts, a person may not be incarcerated
under Title 15 of the U.S. Code, Section 78, unless they have knowledge of the
law they are actually violating. Her lawyers were not available for comment
after the trial.
A sentencing hearing for Jensen has not been set.
Filed by Carleen Hawn of Financial Week, a sister publication of Workforce
Management. To comment, e-mail editors@workforce.com.