Bloomberg News

Ex-Brocade Chief Reyes Conviction for Backdating Upheld

October 13, 2011

(Updates with court in second paragraph.)

Oct. 13 (Bloomberg) -- Greg Reyes, the former chief executive officer of Brocade Communications Systems Inc., lost a bid to reverse his conviction for backdating employee stock- option grants and hiding the practice from auditors and investors.

The U.S. Court of Appeals in San Francisco today upheld the 18-month prison sentence and $15 million fine imposed after his second criminal trial. Reyes’ first conviction was thrown out by the same appeals court in 2009 because of prosecutorial misconduct.

The three-judge appeals panel said that it found no misconduct in the second trial and that there was sufficient evidence that the backdating was material to investors. Reyes, 49, argued that prosecutors had falsely alleged that he granted himself backdated stock options and had made other mistakes at trial.

Seth Waxman, Reyes’s attorney, didn’t immediately return a message seeking comment on the ruling.

In 2007, Reyes was the first chief executive convicted by a jury in a broad government crackdown on options backdating. Hiding the backdated stock grants inflated the San Jose, California-based company’s shares because the costs associated with the grants weren’t reported to shareholders or regulators, prosecutors said.

Brocade investors lost as much as $197.8 million in 2005 when they sold shares that had fallen in value after the practice was uncovered and the company restated financial results, prosecutors said in court filings.

Grant Dates

Stock options allow holders to buy shares at a later date, usually at the trading price on the day they were granted. Through backdating, companies change the grant date to a day with a lower stock price, giving recipients built-in profits. Unless disclosed and recorded as an expense, the practice is illegal because it hides costs from shareholders and regulators.

Brocade’s former human-resources manager, Stephanie Jensen, was convicted of helping Reyes backdate options and was sentenced to two months in prison. The company paid a $7 million fine to resolve a U.S. Securities and Exchange Commission lawsuit over backdating and $160 million to settle securities- fraud claims by shareholders.

Reyes was ousted from Brocade, a maker of switches for data-storage systems, in 2005.

The case is U.S. v. Reyes, 10-10323, U.S. Court of Appeals for the ninth Circuit (San Francisco).

--Editors: Andrew Dunn, Michael Hytha

To contact the reporter on this story: Karen Gullo in San Francisco at kgullo@bloomberg.net

To contact the editor responsible for this story: Michael Hytha at mhytha@bloomberg.net


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