Posted by: Peter Burrows on July 21, 2007
Courtroom No. 8 at the Federal courthouse in San Francisco was packed last Thursday, on the assumption that Judge Charles Breyer would rule on a motion by the defense to dismiss all charges in the options backdating case against former Brocade Communications CEO Greg Reyes. But those waiting for such legal drama were quickly disappointed. Just seconds after taking his seat, Breyer said he would reserve the right to rule on the Criminal Procedure 29 motion another time, whether before or after the jury had announced its verdict. Rule 29 motions, by the way, are made in cases where the defense feels the prosecution’s case is so weak that it shouldn’t be left to a jury to decide.
Rather than help anyone handicap this trial, which could set a precedent for executives at the 200-plus companies implicated in the backdating scandal, Breyer's decision just makes it harder to call. While legal experts say judges rarely grant 29(a) motions, preferring instead to let juries do their work, the fact that Breyer didn't deny this one outright suggests he feels there's at least some merit to the Reyes team's arguments.
Still, unless or until Breyer makes a call on the motion, the most probable guess is that the jury will decide this one (possibly by the end of the month or soon thereafter, after Reyes' lawyer wraps up his case on Monday, July 23).
To be sure, anything can happen in a jury room. But as the case winds its way towards its end, one thing that stands out is the witnesses who were not called to the stand. I'm thinking of three no-shows, in particular: Silicon Valley super-lawyer and former Brocade boardmember Larry Sonsini, former Brocade CFO Mike Byrd, and former Brocade sales executive Dan Cudgma.
First, there's Sonsini. He was on Brocade's board during the years when the alleged backdating occurred, and his firm advised Brocade on compensation issues. That front-row seat landed Sonsini on the witness list for both the defense and the prosecution. The fact that the prosecution didn't call him suggests they didn't feel he held any smoking guns regarding Reyes' intent to cook the books, by failing to book expenses associated with backdated option grants.
Why didn't Reyes' lawyer, Rich Marmaro, call on Sonsini? Most sources say they expected him to do just that on July 11. But by then, the government had rested its case, and Marmaro soon opted for the Motion 29 route instead. Assuming Marmaro truly believes the government's case is so weak that the judge might throw it out, then putting Sonsini on the stand might be an unnecessary risk.
The most interesting no-show is Byrd. He was once a close ally and personal friend of Reyes, who joined Brocade soon after it went public in 1999 and was promoted to president and COO two years later. That put him in position to know better than anyone about Reyes' understanding of accounting rules regarding options. But Marmaro has said that Byrd, not Reyes, was the principal architect of many of Brocade's controversial options practices of the Net boom years, such as one that let new employees get their options on the day they agreed to join, even if they didn't start work until weeks later. (Other former Brocade sources confirm this as well. In fact, many people were surprised when Byrd wasn't indicted along with Reyes and former human relations vice president Stephanie Jensen back in August, 2006). Neither Byrd or his lawyer returned phone calls seeking comment.
As such, many of Reyes' supporters believe Byrd was granted immunity from prosecution for his role in any improper backdating, in exchange for his testimony.
Assistant DA Assistant US Attorney Tim Crudo denies this, saying "We have no agreement with Mr. Byrd." Either way, the government's decision not to put Byrd on the stand suggests he doesn't hold any smoking guns, either--or that the prosecution fears his credibility would not hold up under Marmaro's questioning. Crudo wouldn't comment on his reasons for not calling Byrd to the stand.
Cudgma's role in all of this is interesting, as well. For starters, he set off the entire backdating saga at Brocade. In late 2004, his lawyer sent a draft of a lawsuit to Brocade alleging that options given to him had been improperly backdated (it claims he got stock in November, 2001, even though he didn't start working at Brocade until early 2002)--and threatened to file the suit if Brocade didn't back off on its intention to repossess Cudgma's home for not having paid off a loan from the company. The draft suit was quickly shown to Sonsini, say sources. Within days, the company's board had launched a massive internal investigation that subsequently led to a big earnings restatement and drew the attention of the SEC and Department of Justice.
By then, Cudgma was long gone from Brocade. Ironically, Marmaro and other sources say he was fired by Reyes for his role in a commission fraud against the company. (Marmaro wanted to tell this to the jury to show Reyes' ethical nature, but the judge shot that down as immaterial to the case). Still, the backdated grants mentioned in Cudgma's suit were a major focus of the government's indictment, though Cudgma wasn't mentioned by name (See paragraph's 35 and 39).
Now, it seems the government is no longer focusing on the grant to Cudgma. Instead, the government's case focuses mostly on grants given to Brocade's rank-and-file, based mostly on testimony from low and mid-level employees within Brocade's finance department.
I'm no lawyer, and Crudo wouldn't explain his reasons for not callign Sonsini, Byrd or Cudgma. There may be good reasons. Still, my hunch is that these no-shows are a sign of weakness in the government's case. There's a chance Sonsini, Byrd and Cudgma could still be called, when the prosecution has its chance to rebut once Marmaro rests his case. But if they had testimony to prove "beyond a reasonable doubt" that Reyes had knowingly broken laws, wouldn't we have heard from them already?