SAN FRANCISCO (AP) — Former Brocade Communications Systems Inc. Chief Executive Gregory Reyes was convicted yesterday of defrauding investors in the first stock options backdating case to go to trial.
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' case was seen as an important test of whether a jury considers it a crime deserving of jail time.
Reyes wiped his forehead with a handkerchief and glared at the jury as the verdict was announced. His wife, Penny, sobbed. They embraced afterward and left the federal courthouse in San Francisco without commenting.
Reyes' lawyer said he plans to appeal.
"Today, we are disappointed. Tomorrow, we will continue the fight," attorney Richard Marmaro said. "Greg Reyes is innocent and we are confident he will ultimately be exonerated. At all times, he acted in the best interests of the employees and shareholders of Brocade."
Assistant U.S. Attorney Tim Crudo declined to comment, as did members of the jury.
After denying a long-pending defense motion to have the case dismissed for lack of evidence, U.S. District Judge Charles Breyer scheduled Reyes' sentencing for Nov. 21. He could face a decade or more in prison.
The trial lasted six weeks and went to the jury on July 30.
Some observers wondered whether the government's case would be harmed by the firing of Kevin Ryan — the Northern California U.S. attorney who brought the charges against Reyes and was investigating backdating accusations against other technology companies and executives. Mr. Ryan was fired as part of the Bush administration's purge of eight U.S. attorneys.
Instead, Reyes' conviction could embolden prosecutors. The federal government has reportedly been considering criminal charges against former executives at Apple Inc., KLA-Tencor Corp. and Broadcom Corp., companies that have all acknowledged stock options irregularities.
Backdating refers to the practice of selecting favorable dates in the past when the company's stock price was low, and retroactively pegging options grants or contracts to buy shares to those dates. The goal is to boost the recipient's potential windfall, and it's only illegal if it's not properly disclosed and accounted for.
Reyes was charged with 10 felony counts of securities fraud.
Prosecutors accused Reyes and former vice president of human resources Stephanie Jensen of doctoring company records and lying to investors and auditors about the company's options practices to falsely boost Brocade's profit.
Miss Jensen is being tried separately. No trial date has been set for her case.
The government said the two illegally concealed that Brocade was awarding "in the money" grants — options that already had value when they were given, thus requiring the company to incur compensation expenses.
By keeping the charges off the company's financial records, prosecutors argued, the executives misled investors about the true profitability of San Jose, Calif.-based Brocade, which makes switches and software used to connect corporate servers and data storage systems.
Reyes' defense team countered that he didn't understand the accounting implications of his actions and relied on Brocade's financial department to properly record the expense.
Some defense witnesses also testified that options-related expenses weren't even relevant in calculating Brocade's core profitability and measuring the success of its operations.
Prosecutors 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.
Mr. Crudo said Reyes knew Brocade's financial reports and board meeting records were incorrect but signed them anyway, and also lied to auditors about the company's options practices.
In May, Brocade and Mercury Interactive LLC, now owned by Hewlett-Packard Co., became the first two companies to pay fines to settle accusations by the Securities and Exchange Commission of civil fraud accompanying backdating. Brocade agreed to pay $7 million and Mercury agreed to pay $28 million.
Reyes and Miss Jensen were also initially charged last summer with two felony counts each of mail fraud, but those charges were later dropped.