Opinion ID: 615264
Heading Depth: 1
Heading Rank: 1

Heading: FACTUAL BACKGROUND.Backdated Stock Options

Text: Brocade develops and sells data switches for networks. It became a publicly traded company in 1999. Reyes was hired in 1998, and during his tenure served as CEO and Chairman of the Company's Board of Directors (Board). Brocade offered stock options to its newly hired employees, and its employees generally could also earn stock options through annual incentive programs. These options gave employees the right to purchase Brocade stock at a fixed exercise (strike) price on or after a specific vesting date. A stock option is in-the-money if the strike price is below the stock's current market value. Backdating stock options means that an option's grant date and strike price are recorded retroactively. During the relevant time period, backdating of Brocade stock options was not illegal as long as the benefit to Brocade employees was recorded on the Company's financial records as a non-cash compensation expense to Brocade. See Reyes, 577 F.3d at 1073. This accounting treatment was required by the then-applicable Accounting Principles Board Opinion No. 25 (APB 25). [1] It is undisputed that the stock options relevant to this appeal were backdated, and were not properly entered in the Company's books, as then required by APB 25. Reyes approved grants of stock options to Brocade employees from 2000 through 2004. Company policies permitted Reyes (as a sort of one-person committee) to approve grants of stock options to non corporate officer employees. However, a committee of outside directors, who comprised the Compensation Committee, was required to approve the grant of stock options to Company officers and the full Board of Directors was required to approve the grant of stock options to non-officer directors. Committee minutes or unanimous written consents were used to document the number of options granted to specific employees as of a particular date.