CEO convicted in Brocade stock options trial

Former Brocade Communications Systems brcd CEO Gregory Reyes was convicted Tuesday of defrauding investors in a stock options backdating scheme.

The guilty verdict on all counts is an important validation of the Justice Department's options backdating probe, which has so far led to criminal charges against at least 10 executives. Reyes was the first executive to go to trial over backdating, and his case was seen as an important test of whether a jury considers it a crime deserving of jail time.

Reyes wiped his forehead with handkerchief and stared at the jury as the verdict was announced. His wife sobbed.

His conviction could embolden prosecutors in their ongoing options investigation. The government has reportedly been looking at filing criminal charges against former executives at Apple aapl, KLA-Tencor klac and Broadcom brcm, companies that have all acknowledged stock options shenanigans.

Reyes was charged with 10 felony counts of securities fraud accusing him of doctoring company records and lying to investors and auditors about the company's options practices to falsely boost Brocade's profit. The trial, which lasted six weeks, went to the jury July 30.

He could face decades in jail and millions of dollars in fines. Sentencing is scheduled for Aug. 21.

He was CEO of the data-storage network switch maker from 1998 to 2005.

Backdating refers to the practice of selecting favorable grant dates in the past when the company's stock price was low, and retroactively pegging awards to those dates. The goal is to boost the recipient's potential windfall, and it's only illegal if it's not properly accounted for.

Prosecutors say Reyes intentionally kept compensation expenses associated with Brocade's options awards off the company's books. His defense team says he didn't understand the accounting implications and relied on Brocade's financial department to properly record the expense.

Reyes was charged last summer along with Stephanie Jensen, Brocade's former vice president of human resources, with 12 felony counts each of securities fraud and other offenses. Two mail fraud charges were dropped for both defendants.

The executives are being tried separately. A trial date for Jensen has not been set.

The government alleges they illegally concealed that Brocade was awarding "in the money" grants — or options that already had value when they were given out, and thus require the company to incur compensation expenses.

By keeping those charges off the company's financial records, prosecutors say, the executives misled investors about the true profitability of Brocade, which makes switches and software used to connect corporate servers and data storage systems.

Some defense witnesses testified that options-related expenses weren't even relevant in calculating Brocade's core profitability and measuring the success of its operations.

Assistant U.S. Attorney Tim Crudo countered that the government doesn't have to prove that Reyes knew which securities laws he was breaking, just that he knew what he was doing was wrong.

He said Reyes knew Brocade's financial reports and board of directors meeting records were incorrect but signed them anyway, and lied to auditors about the company's options granting practices.

In May, Brocade and Mercury Interactive, now owned by Hewlett-Packard (hpq, became the first two companies to pay fines to settle allegations by the SEC of civil fraud accompanying backdating. Brocade agreed to pay $7 million and Mercury agreed to pay $28 million.

null
Join the Discussion
You are using an outdated version of Internet Explorer. Please click here to upgrade your browser in order to comment.
blog comments powered by Disqus
 
You Might Also Like...