Ex-Brocade CEO Convicted Of Stock Option Backdating

Gregory Reyes, ex-CEO of Brocade Communications and former owner of the San Jose Sharks, was found guilty by a federal jury on 26 March of intentionally backdating stock options for the benefit of employees and himself, according to the San Jose Mercury News and Reuters.

Reyes, the former chief executive of the San Jose, CA-based data centre infrastructure company, was found guilty on eight counts, including securities fraud and making false statements; however, he was acquitted on the charge of conspiracy. 

This is the not the first case brought by the government against Reyes, who had been found guilty on 10 counts of backdating options in 2007, where he was fined $15 million (£10m) and sentenced to 21 months in prison. On appeal, that decision was overturned on the grounds the prosecution “made a false assertion of material fact to the jury during closing arguments,” wrote Reuters.

The government has been trying to win a number of backdating options cases, and it appears this victory could land Reyes in jail, according to news reports. The government was not able to win in a backdating case against Irvine, CA-based computer chip maker Broadcom, whose case was thrown out of court in December 2009.

“Options backdating has always been fairly well removed from the typical securities fraud involving falsified accounting records or insider trading, the type of conduct that juries can easily see is improper,” wrote professor Peter J. Henning of Wayne State Law School in a New York Times blog about the Broadcom case going awry for the government.

How did the government win its case this time? There were a number of factors, including damning testimony from witnesses who said former Brocade human resources executive Stephanie Jensen told executives not to send e-mails to each other or document anything about options backdating because their CEO, Reyes, did not want a paper trail. Jensen was sentenced to four months in jail and fined $1.25 million for her role in Brocade backdating.

”

In his second trial, Reyes’ attorneys made what legal experts said was a potentially risky decision: They opted not to call any witnesses in his defense, arguing instead that the government had failed to prove its case,” wrote Brandon Bailey of the San Jose Mercury News in a 26 March article. 

”Gregory Reyes came up with a very clever and illegal scheme to get around this problem,” said Assistant U.S. Attorney Adam Reeves, according to Reuters. “Gregory Reyes began to intentionally backdate the option grants. … It was simple. It was ingenious.

And it was a total fraud.”

The defence admitted that backdating and accounting mistakes took place, but argued that Reyes was not alone and did not knowingly commit criminal activity. Bailey of the San Jose Mercury News wrote:

“Citing evidence that Brocade board members and financial officers were also aware of the backdating, or even took part in it, [defense attorney Stephen] Neal argued that Reyes relied on the finance officials to ensure that Brocade was complying with complex and confusing accounting rules. During the three-week trial, prosecution witnesses testified that Brocade reported annual profits in 2001 and 2002 when the company’s backdating expenses should have led the company to report a net loss of more than $175 million in each year. Brocade has since revised its earnings statements for the period.”

It is possible Reyes’ defense team could appeal, but barring that event, Reyes will be sentenced on 24 June.