1st Options Trial Ends In Guilty Verdict

By Carrie Johnson
Washington Post Staff Writer
Wednesday, August 8, 2007

A San Francisco jury yesterday convicted the former chief executive of Brocade Communications Systems on fraud and conspiracy charges, giving the government its first guilty verdict in a widespread scandal over tampering with stock option awards.

Gregory L. Reyes, 44, was the first corporate leader indicted for alleged stock backdating improprieties to take his case to a jury. Reyes, a part owner of the San Jose Sharks hockey team whose family has deep roots in Silicon Valley, could receive as many as 20 years in prison at his sentencing, set for November.

The jury's decision to find Reyes guilty on all 10 criminal charges he faced followed a six-week trial and more than a week of deliberation.

Shortly after hearing the verdict, U.S. District Judge Charles Breyer delivered another blow to the defense, announcing he would reject a bid to dismiss the case. The judge, who is the brother of Supreme Court Justice Stephen G. Breyer, ruled that prosecutors had presented sufficient evidence to tie Reyes to the crimes.

Scott Schools, the U.S. attorney in San Francisco, said "the system worked," according to Bloomberg News.

Richard Marmaro, an attorney for Reyes, told reporters at the courthouse in San Francisco that his client would appeal. In a statement distributed to wire services, Marmaro said Reyes was "innocent, and we are confident he will ultimately be exonerated." He continued, "At all times, he acted in the best interests of the employees and shareholders of Brocade."

Reyes did not testify in the case. Rather, his advocates argued that he relied on accounting advice from experts and that he did not intend to break the law.

Legal analysts said the conviction shows that jurors can unpack complex corporate and accounting issues, even if it takes them several days to weigh conflicting evidence.

The verdict gives prosecutors and securities regulators momentum to move forward with similar civil and criminal probes. Securities and Exchange Commission enforcers are pursuing stock option investigations at more than 140 companies, including Apple, Barnes & Noble and UnitedHealth. The Justice Department has lodged criminal charges against 10 corporate officials over options improprieties.

Stock options give workers an opportunity to purchase their company's shares at a specific price and within a set time period. Employees make money based on the difference between the stock price on the day the options are awarded and the price on the day the shares are sold. The awards became a critical recruiting tool in the 1990s, particularly for companies seeking to attract technology workers in a competitive labor market.

Backdating is not always illegal, but it can violate the law and have tax consequences if it is not properly disclosed to investors.

In the case of Brocade, which makes telecommunications equipment, law enforcement officials said the San Jose company underreported expenses and boosted revenue because of options backdating between 2000 and 2004.

In May, Brocade settled civil charges brought by the SEC by agreeing to pay $7 million. Stephanie Jensen, a former Brocade human resources official indicted with Reyes on conspiracy and related charges, has yet to go to trial.

Meanwhile, U.S. authorities continue efforts to extradite former Comverse Technology chief executive Jacob "Kobi" Alexander to face criminal allegations that he made option awards to ghost employees and created a slush fund to reward his favorite subordinates. Alexander declined to surrender to FBI agents last year and decamped to Namibia, where he relocated his family.

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