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