San Francisco — According to the arguments of prosecutors on Monday, the former Brocade Communications Systems Inc. executive was a key enforcer in an illegal accounting scheme, while her attorney said she was just following instructions when she backdated stock options. According to testimony on the same day, the former personnel director brushed aside concerns about the legality of the company's backdating of stock-option grants and told a subordinate not to discuss the practice in e-mails.

Brocade's former vice president of human resources, Stephanie Jensen, 50, went on trial on Monday in the U.S. District Court for the Northern District of California on felony charges of conspiracy and falsifying corporate records. If condemned, she may be penalized to spend 25 years in prison.

According to Assistant U.S. Attorney Adam Reeves, Jensen instructed her staff to choose favorable dates in the past for stock options awards and warned them never to communicate by e-mail about the company's stock option activities. Reeves told that Jensen directed and enforced the practices and knew they were illegal.

Reeves said, "She deliberately falsified Brocade's options grant records and carefully tried to cover up her scheme so that the auditors, the company's watchdogs, would never know what happened; it was simple, it was ingenious and it was a total fraud."
Brocade's senior compensation and benefits manager from 2001 to 2002, Stephen Beyer, brought up the subject in a 2002 meeting, however, "her response was, she didn't hold a concern about that, and that the CEO had directed her to take that action and that that's what we were going to do," Beyer testified as the government's first witness against Stephanie Jensen, Brocade's former human resources vice president. She also told Beyer not to send e-mails referring to the company's backdating. The testimony came on the first day of trial against Jensen in U.S. district court in San Francisco.

However, Jensen has pleaded not guilty to one count of falsifying books, records and accounts and one count of conspiring to commit such acts. According to Jensen's lawyer, her client implemented policies already in place when she joined Brocade. Jan Little, Jensen's lawyer said, "This is not her scheme, this is not her idea, this is a process the company used and she followed."

Little also argued that Jensen doesn't have a finance background and didn't know San Jose-based Brocade wasn't properly recording compensation charges for options. Prosecutors contend those omissions distorted the picture investors saw of the company's profitability. Little said, “Jensen never for one second thought those documents were false, or wrong or illegal."

San Jose, California based Brocade is the world's largest maker of switches for corporate data-storage networks. The company had booming stock price, like many Silicon Valley companies in the dot-com era. It attracted talents offering lucrative stock options in addition to cash compensation and bonuses. When the alleged offenses occurred between 2000 and 2004, the was in a fierce battle for engineering and sales talent.

Jensen is the second person to go on trial for alleged stock options malfeasance since the Justice Department began probing allegations of options backdating at more than 100 companies. The former Brocade chief executive Gregory Reyes, Jensen’s former boss was convicted of 10 counts by a U.S. federal jury in the same courtroom where Jensen is being tried, but his sentencing date has not been set yet. At least 10 executives at several companies have been criminally charged as a result of federal options probes.

The U.S. prosecutors wrote in an Oct. 31 court filing, "Jensen oversaw and directed the process by which the earlier date was selected, presented to Reyes, and recorded in the company's corporate records. She also oversaw and directed the process by which other personnel records were falsified."

Jensen's attorney, Jan Little maintains that her client had followed the orders of Reyes, was unaware of the accounting and legal consequences of backdating and had inherited a compensation system devised by the company's former chief financial officer, Michael Byrd. Byrd, like Reyes and Jensen, faces backdating-related civil charges filed by the U.S. Securities and Exchange Commission. The SEC alleges that Brocade's backdating concealed millions of dollars in expenses from investors and overstated its income.

The outcome of the trail, like the conviction of former Brocade Chief Executive Gregory Reyes on related charges in August, is seen as a harbinger of how aggressively U.S. prosecutors and regulators will pursue dozens of other cases involving companies that allegedly used hindsight to price options grants on dates when their stock was low, locking in potential gains. The scandal has made hundreds of businesses to act promptly to review their financial records and some to wipe out hundreds of millions of dollars in previously reported profits to account properly for options-related charges.

Jensen, whose office processed all the paperwork for new hires, is accused of changing the dates on offer letters and other documents to make it appear that prized new workers were hired and granted options before their actual hire date. The practice makes the options more valuable because they have appreciated more by the time the employees exercised them.

Backdating options isn't illegal, but companies must properly account for it. And if the amount an employee can pay for the stock is below the trading price on the day the options were granted, the company must absorb charges for that difference, which can be substantial.

According to the Prosecutor Reeves, while Reyes bears a heavy responsibility for the scheme, Jensen was the "key person who ensured that the details of this fraud were carried out as they were."

Originally charged with eight felonies, Jensen however was absolved from six charges, including the more serious allegations of securities fraud by the government. Presently, She is charged with conspiracy to falsify records and falsifying records. The trial is expected to go on for two to three weeks.