Former Brocade CEO guilty of backdating charges

by Robert McMillan

August 7, 2007 —

A jury has found former Brocade Communications Systems Inc. CEO Gregory Reyes guilty of charges related to the company's backdating of stock-option grants.

Reyes was charged last year with falsifying documents such as meeting minutes and financial documents to make it appear that stock options were granted at a time when the price of shares of Brocade's stock was low.

The former Brocade CEO was found guilty Tuesday on all 10 charges brought by federal attorneys in the case, including charges of securities fraud, conspiracy, and of falsifying financial records. He now faces as many as 20 years in prison and US$5 million in fines on some of the counts.

The conviction is the U.S. Department of Justice's (DOJ's) first relating backdating.

"He was involved in a scheme to backdate stocks and not to record the costs," Tim Crudo, assistant attorney with the DOJ, said at a press conference. Reyes' sentencing hearing is scheduled for Nov. 21.

Brocade has already restated its 1999 to 2004 results because of accounting issues related to these grants.

The practice of back-dating stock option grants has come under intense scrutiny over the past few years. Many Silicon Valley companies, including Apple Computer Inc., McAfee Inc., Sycamore Networks Inc. and Rambus Inc., have been under investigation for their stock option practices around the late 1990s, a time when technology companies were competing fiercely for top executive talent.

Backdating may have helped companies like Brocade attract employees, but it also cost investors millions of dollars, the government says.

Reyes' conviction has no binding to other backdating cases pending, said Scott Schools, attorney with the DOJ. All cases stand on their own merit, Schools said.

The conviction shows that backdating charges are provable, Schools said. The department is confident it will be able to file charges against others involved in securities fraud, Schools said. "There are tons of paper to look through before deciding to file charges," Schools said.

The U.S. Federal Bureau of Investigation supported the investigation until the case was ready to go for indictment, Schools said. The DOJ also received assistance from the SEC in the investigation.

Reyes is disappointed at a verdict, but will continue to fight until exonerated, said his lawyer, Richard Marmaro in a statement.

"Greg did not enrich himself or gain personally from Brocade's stock option granting practices, and the government never even accused him of that," Marmaro said.

IDG News Service