In Retrial, Former Brocade CEO Found Guilty of Most Counts

Kate Moser
The Recorder
March 29, 2010

A federal jury on Friday convicted former Brocade CEO Gregory Reyes on nine out of 10 felony counts -- just one less than the last time he was tried over the backdating of stock options.
The government had seen its 2007 conviction of Reyes, its first and most high-profile conviction of an executive over backdating, thrown out last year by the 9th U.S. Circuit Court of Appeals, which said prosecutors had misled jurors with false assertions during closing arguments.
Reyes, whose defense at his first trial was led by Skadden, Arps, Slate, Meagher & Flom partner Richard Marmaro, was originally sentenced to 21 months in prison and given a $15 million fine. On Friday, prosecutors told U.S. District Judge Charles Breyer that they would ask the court to revisit his loss calculation. If Breyer does, it could ramp up the sentencing guidelines.
Reyes' defense this time was led by Cooley Godward Kronish Chairman Stephen Neal, who didn't call any witnesses during the four-week retrial.
On Friday, Neal told reporters he will file a motion for a new trial and would appeal if it's denied. He declined to comment further.
The jury in the retrial, which deliberated for 3 1/2 days, had appeared to be hung up on the conspiracy count. The questions the jury asked toward the end of deliberations suggested that jurors were having trouble believing that there was a conspiracy between Reyes and former Brocade human resources chief Stephanie Jensen. The jury ultimately acquitted Reyes of that count.
After Breyer discharged the jury, Assistant U.S. Attorneys Adam Reeves and David Anderson told the judge that the government would have additional information for him to use in calculating how much loss Reyes caused.
In the first trial, the 21-month sentence for Reyes was based on a calculation of zero loss.
This sentencing will be different, Reeves told the judge, because "the court will be able to reasonably calculate loss."
Breyer also indicated Friday that he intends to again take obstruction of justice into consideration in his sentencing, referring to a sworn declaration Reyes made for Jensen's defense. Reyes at that time stated that no backdating had occurred at Brocade.
At Reyes' original trial, though, his lawyers asserted that backdating had in fact occurred, but that Reyes was unaware it was wrong. Citing the sworn declaration and the effect it had on the motion for separate trials, Breyer in the first trial slapped Reyes with six extra months in prison for obstruction of justice.
Backdating is the practice of moving the date of an employee's stock-option grant to an earlier period, when the stock price was lower. This increases the value of the award to the employee at no apparent added cost to the company. However, accounting rules require the company to record such a move on its balance sheet.
Scores of companies have been accused of incorrectly accounting for options and even falsifying minutes of directors' meetings to cover up the backdating.
Sentencing is set for June 24