Former Brocade CEO Guilty of Backdating

— -- In a legal win for the Justice Department, a jury on Tuesday found Gregory Reyes, the former CEO of Brocade brcd Communications Systems, guilty of all charges in the first conviction of an executive in the government's nationwide crackdown on stock-option backdating.

The verdict in the month-and-a-half trial is expected to encourage prosecutors to pursue more criminal cases involving executives who allegedly took part in backdating options grants to favorable dates.

"When the government wins convictions, it energizes prosecutors," says Jacob Frenkel, a former federal prosecutor now at the Shulman Rogers Gandal law firm. "Any case that was seen as a marginal criminal case may now be pushed to the front burner."

The 12-person jury, which deliberated for six days, returned its verdict at noon and convicted Reyes of 10 counts, including conspiracy to commit securities fraud, mail fraud, falsifying books and making false statements to auditors.

Reyes glared at jurors and left the courtroom while his wife cried, the Associated Press reported. Reyes, who will be sentenced Nov. 21, could face years in prison and millions of dollars in fines.

In a statement, defense attorney Richard Marmaro said he will appeal. Marmaro said that Reyes "acted in the best interests of the employees and shareholders of Brocade" and did not profit from "any of the alleged backdating."

After the verdict, Scott Schools, the acting U.S. Attorney in San Francisco, was asked if the case could lead to more backdating indictments and replied "every case stands on its own facts," Bloomberg News reported.

Reyes, 44, led Brocade from a Silicon Valley start-up to a $240 million-a-year data-storage giant. Prosecutors alleged that he schemed to falsify board records on backdated options, and hid company finances from auditors, investors and regulators.

Backdating increases stock options' potential value, but it is not illegal if properly accounted for to regulators and investors.

The backdating cases have won praise from shareholders and criticism from defense attorneys who say questionable accounting practices are being turned into hard-core crimes.

The verdict erodes a long-standing legal pillar that defendants should profit from their crimes to be convicted. Reyes did not cash in his backdated options.

William Leone, a former U.S. Attorney in Denver now at the law firm Faegre & Benson, says that criminal cases used to involve lying, cheating and stealing. "If you didn't have stealing," he says, "the cases were much more difficult."

Private attorneys also say juries in the post-Enron era find it easier to convict executives of accounting crimes.

"We are very much in a culture now where the criminal prosecution of corporate misconduct is accepted," Frenkel says, "even where the activity should be actionable only in civil courts."

Also Tuesday, U.S. District Judge Charles Breyer rejected an earlier defense motion to dismiss the case.