updated 8/17/2007 6:10:44 PM ET 2007-08-17T22:10:44

The former chief financial officer of Brocade Communications Systems Inc. was charged Friday with eight counts of civil securities fraud for allegedly ignoring that the company was improperly accounting for backdated stock option awards.

The Securities and Exchange Commission alleged that Michael Byrd, 45, who served as Brocade’s CFO from 1999 to 2001, knew the company should have been incurring compensation expenses for certain option grants to workers but failed to incorporate those charges into the financial reports released to investors.

The SEC sued Byrd in U.S. District Court in San Francisco. He is accused of violating various securities laws and defrauding investors by approving faulty financial statements. Brocade eventually had to restate its results to correct for the mishandled awards, reducing net profit by a total of $303 million from 1999 to 2001, according to the complaint.

“CFOs are gatekeepers — they’re in a position to stop frauds like this,” Bob Leach, an investigator in the SEC’s San Francisco office, said in an interview. “And when a CFO is presented with the red flags like the ones we describe in our complaint, the SEC expects CFOs to take action. And Mr. Byrd did not.”

Byrd is the 25th executive to be sued by the SEC over stock options shenanigans, and the fourth from San Jose-based Brocade. The civil cases against former Brocade Chief Executive Gregory Reyes, former vice president of human resources Stephanie Jensen, and Antonio Canova, another former chief financial officer, are still pending.

Last summer, Reyes and Jensen were the first executives to be criminally charged by the Justice Department, and earlier this month Reyes was convicted of 10 felony counts of securities fraud in the first options backdating case to go to trial.

A jury found he illegally doctored Brocade’s company records and lied to auditors and investors to falsely boost the company’s profit. He faces up to 20 years in prison and a $5 million fine.

Reyes argued he didn’t understand the accounting implications of so-called backdated stock options — or options awards pegged to a date in the past when the company’s stock price was lower — and he relied on Byrd to properly record them on Brocade’s financial statements.

A trial date for Jensen has not been set. At least 10 executives have been criminally charged by the Justice Department over options mishandling.

Byrd’s defense lawyer, John Potter, said Friday his client didn’t know that Brocade executives were manipulating stock option awards. He said Reyes’ conviction should help clear his client, because prosecutors successfully argued that Reyes deceived Brocade’s finance department.

“A jury unanimously accepted the United States Attorney’s position that Mr. Byrd had no knowledge of these illicit activities,” Potter said in a statement. “We fully expect that, if this case is eventually tried, another jury will reach the same conclusion.”

In Friday trading, Brocade’s shares finished unchanged at $6.49.

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