Ex-CEO Gets 21 Months for Tampering With Options

By Carrie Johnson
Washington Post Staff Writer
Thursday, January 17, 2008

The first company chief executive to be convicted for tampering with stock-option awards was sentenced yesterday to 21 months in prison, one of a handful of corporate officials to face punishment for the once-widespread practice.

The courtroom appearance by former Brocade Communications Systems chief Gregory L. Reyes, who was convicted last year on 10 securities fraud charges, refocused public attention on a scandal that touched off hundreds of government investigations and hastened the dismissal of top corporate executives.

Securities regulators and federal prosecutors vowed to get to the bottom of stock-option abuses two years ago after media reports exposed their prevalence. Dozens of companies fired executives and ordered costly internal investigations. Lately, however, the backdating issue has been playing out with a whimper rather than a bang, with many cases quietly resolved.

"When the government sends out 100-something subpoenas, it sets off a lot of activity, and it results in enormous costs to companies in terms of accountants and lawyers and restatements," said former prosecutor Matthew J. Jacobs, who has advised companies on how to address backdating accusations. "The thing we don't know is whether there are other shoes that are going to drop."

Reyes, 45, took a remarkable fall from grace from his perch in Silicon Valley, where he led a prominent data-switch company, had deep family ties and owned part of the San Jose Sharks hockey team. Prosecutors singled out Reyes because of his substantial authority in doling out stock options, which rewarded favored employees with all-but- guaranteed large payouts. He must pay $15 million in fines but will remain free pending an appeal of the conviction, U.S. District Judge Charles R. Breyer said.

"I'm sorry," Reyes told the audience in the San Francisco courtroom, according to the Associated Press. "There were many things I would have done differently."

The Securities and Exchange Commission, which at one point had 160 open stock-option investigations, resolved many of them without bringing charges. Now only half that number of cases remain active, an agency spokesman said.

The SEC has settled backdating accusations with six companies and has charged 29 executives with wrongdoing. In the largest such case, former United Health Group chief executive William W. McGuire in December agreed to surrender $468 million in cash and options to settle the SEC's backdating charges.

"Whenever a corporate officer misleads investors about a company's performance by secretly backdating stock options, the integrity of our markets is undermined," SEC Chairman Christopher Cox said at the time.

Options give company employees and officers the chance to buy company stock at a set price within a specific time frame. Backdating the awards can make them more valuable. The practice is not necessarily illegal but it can violate securities and tax laws if it is not disclosed properly to investors.

Meanwhile, the Justice Department's marquee backdating prosecutions are simmering on the back burner.

Comverse Technology founder Jacob "Kobi" Alexander fled to Namibia in 2006 and authorities are trying to extradite him to face trial in Brooklyn. The former general counsel at McAfee and the former president of Brooks Automation have been indicted and are fighting charges.

© 2008 The Washington Post Company