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Jury convicts Brocade ex-CEO in options trial
2007-08-08
A U.S. jury convicted the former chief executive of Brocade Communications Systems Inc (BRCD.O) on Tuesday on all counts in the government's first criminal trial of stock options backdating. Legal experts said the conviction could embolden prosecutors and regulators in their pursuit of similar cases. More than 170 U.S. companies have been touched by scandals over whether options grants were retroactively priced on days when a stock was low, maximizing gains for employees. Former Brocade CEO Gregory Reyes, 44, was found guilty of 10 counts, including conspiracy to commit securities fraud, mail fraud, falsifying books, records and accounts, and making false statements. Reyes, who could face decades in jail and millions of dollars in fines, hugged his wife and appeared to be holding back tears after the verdict was announced. His attorney later issued a statement saying he would appeal. "Greg Reyes is innocent and we are confident he will ultimately be exonerated," Richard Marmaro, Reyes's attorney, said. "At all times, he acted in the best interests of the employees and shareholders of Brocade." Judge Charles Breyer, who during the trial in San Francisco federal court had questioned the strength of the prosecution's case, rejected a motion to acquit. He signed the ruling last week but only released it after the verdict was reached. Tim Crudo, the trial's lead prosecutor who is also involved in deciding whether to bring criminal charges over backdated options at Apple Inc (AAPL.O), smiled after the trial but declined to comment on the verdict to reporters. Reyes, who was CEO of the San Jose, California-based data-storage network switch maker from 1998 to 2005, had not been accused of directly enriching himself, unlike executives accused at many other companies. That made his conviction on fraud and other charges all the more powerful. "This is a pretty strong message to other prosecutors considering other cases ... that they can also obtain convictions," said John Coffee, a professor at Columbia Law School. "Prosecutors like to be able to say 'we are not breaking new ground.' And now the ground, such that it is, has been broken." Peter Henning, a law professor at Wayne State University who specializes in white-collar crime, said prosecutors now may get more cooperation from lower-level executives to help them build cases against those further up the corporate hierarchy. "We may see more plea bargains. Defense lawyers are going to notice this," he said, adding that all eyes would now be on Apple, which has also been under scrutiny for backdating. "I suspect people will be looking mostly at Apple, just because of 'you-know-who.' Although I don't think you'll see a criminal case against (Apple CEO and co-founder) Steve Jobs." OPTIONS ATTRACTED EMPLOYEES The jury in the Reyes trial, which began June 18, reached its verdict after seven days of deliberations. Prosecutors contended that Reyes orchestrated a four-year effort to deceive shareholders and regulators by not properly accounting for stock-option grants. They said the tactic was widespread among cash-strapped technology companies that used options to lure and keep talented engineers and programmers. Reyes's attorney argued that the former CEO indeed approved backdated stock-option grants to attract employees, but he relied on assurances that the practice was legal from Brocade's finance and human resources experts. An option gives the holder the right to buy shares at a fixed price in the future, in the hope the price will go up so that selling them will yield a profit. The price is normally set at a stock's market price on the date an option is granted. In backdating, however, grant dates are set to precede a rally in the underlying shares. The practice is not outright illegal, but can run afoul of the law if not properly accounted for. Reyes's sentencing is scheduled for November 21. Most of the charges carry prison terms of up to 20 years, but it was unclear whether the terms would be concurrent. He was the first executive tried on criminal charges stemming from the backdating scandal but his is just the latest in a string of U.S. corporate convictions in recent years. Most recently, former Qwest Communications International (Q.N) CEO Joseph Nacchio last month was sentenced to six years in prison and forfeited $52 million of insider-trading gains. About 100 companies have announced restatements totaling more than $12 billion to account for past stock-option grants. Brocade already agreed to pay civil penalties in connection with a related probe by the SEC, which declined to comment on Reyes's conviction. The SEC is probing more than 100 companies' option practices, and SEC Chairman Christopher Cox has said the agency would likely increase the pace of announcements in backdating cases. (Additional reporting by Peter Henderson in Los Angeles, Martha Graybow in New York and Rachelle Younglai in Washington, writing by Nichola Groom in Los Angeles)
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