U.S. accuses ex-Brocade CEO in backdating retrial

Mon Feb 22, 2010 2:18pm EST

Related Topics

* Government: Reyes engaged in "ingenious," illegal scheme

* Defense says finance department documents inaccurate

* Prior Reyes conviction thrown out

By Alexandria Sage

SAN FRANCISCO, Feb 22 (Reuters) - The former chairman and chief executive of Brocade Communications Systems Inc (BRCD.O) engaged in a "very clever and illegal" backdating scheme to defraud shareholders, a prosecutor told a federal jury in the retrial of Gregory Reyes on Monday.

Reyes is being tried again after a federal appeals court last year threw out his original conviction, citing misconduct by prosecutors. The government alleges that Reyes engaged in illegal backdating to reward insiders and mislead investors of the network equipment maker.

"Why would Gregory Reyes backdate options?" Assistant U.S. Attorney Adam Reeves told a San Francisco federal jury as Reyes, wearing a green sport coat, watched. "The answer is simple. This was Gregory Reyes' way to game the system and pad his pocket and the pocket of those inside the company at the expense of those outside the company."

Reyes was the first and highest profile executive convicted of illegal stock option backdating in a government probe into options granting practices at about 170 companies.

Backdating is a practice of locking in financial gains by retroactively pricing option grants on days when a company's stock price was low, in effect increasing the value of the options. It is legal when recorded as a non-cash compensation expense.

Reyes was sentenced to 21 months in prison and fined $15 million after being convicted of securities fraud in 2007.

But his conviction was overturned in August by the U.S. Court of Appeals for the Ninth Circuit, which said prosecutors made a false assertion of material fact to the jury during closing arguments.

At the same time, a conviction against Brocade human resources executive Stephanie Jensen was affirmed, but sent back to the lower court for resentencing.

TOTAL FRAUD?

In the new trial, the government wants to show that Reyes was knowingly responsible for illegally inflating Brocade's earnings from 2000 to 2004.

Reyes sought to avoid the appearance that Brocade was taking a hit to the bottom line, said Reeves.

"Gregory Reyes came up with a very clever and illegal scheme to get around this problem," he said. "Gregory Reyes began to intentionally backdate the option grants .... It was simple. It was ingenious. And it was a total fraud."

But Reyes' lawyer, Stephen Neal, of the law firm Cooley Godward Kronish, spoke of the key role the finance department of Brocade played in the case.

He said prosecutors will be unable to prove that Reyes deceived that department, or directed it specifically to misreport Brocade's financial documents.

"They cannot demonstrate that Gregory Reyes directed or brought about the inaccuracies ... in the financial statements," said Neal.

The government has suffered setbacks in its probe into options backdating. In December, a federal judge dismissed backdating-related charges against Broadcom Corp (BRCM.O) co-founder Henry Samueli and the chipmaker's one-time chief financial officer, also citing prosecutorial misconduct.

The case is U.S. v Reyes et al, U.S. District Court, Northern District of California, No. 06-00556. (Reporting by Alexandria Sage; Editing by Richard Chang)

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