Trial may cast fate of four more execs

Of the valley executives watching the Brocade trial, none may be looking more closely than four former executives from Mercury Interactive, one of the first companies to report it had found abuses in the company’s stock options granting practices.

Last month, when the SEC settled securities fraud charges with Brocade for $7 million, it also settled with Mercury, the Mountain View testing software company now owned by Hewlett-Packard, for $28 million – the largest fine in a backdating case.

At the same time, the SEC sued the former Mercury executives for securities fraud, including its former chief executive Amnon Landan. Landan and the others are not facing criminal charges, but some legal observers say such charges could ensue, depending on the outcome of the Brocade case.

“I think the Reyes’ prosecution will hold a number of lessons for the U.S. Attorney’s Office, so they will likely wait until after that trial before seeking new indictments,” said Peter Henning, a professor at Wayne State University Law School in Detroit. Henning noted that another criminal backdating case would take up many of the U.S. Attorney Office’s resources.

The complaint against the four executives alleges a fraudulent and deceptive scheme to award themselves and other employees undisclosed secret compensation by backdating 45 stock option grants. The complaint also included new charges, such as fraudulent disclosures in financial statements and fraudulent loans to employees overseas.

Attorneys for the former Mercury Interactive executives are all fighting the allegations by the SEC, but they declined to comment.

Some attorneys said based on the SEC’s allegations against the former Mercury executives, the case could merit criminal prosecution.

“The fact that the case involves both options backdating and revenue recognition increases the possibility that someone would look at it as a criminal case,” said James Sanders, a white-collar defense attorney with McDermott Will & Emery in Los Angeles. “If you are a prosecutor, you are going to look at the highest possibility of fraud.”