Posted by: Peter Burrows on August 9, 2007
I called Network Appliance CEO Dan Warmenhoven the other night to talk about the significance of Greg Reyes’ conviction in the first options backdating trial earlier that day. Dan was watching the San Francisco Giants game, and as we talked he suddenly broke in. “There it goes! He did it.” Of course, he was talking about Barry Bonds hitting his 756th homerun to become the all-time home run king.
That got me thinking about the parallels between the Reyes case and Bond’s steroid-related legal troubles. The connection began on July 20, 2006, when former US Attorney Kevin Ryan called a press conference to announce the indictment of Reyes and former Brocade executive Stephanie Jensen--just as many reporters were expecting a presser about a possible indictment of Bonds. It was so much in the air that some people (mostly people close to Reyes) wondered whether Ryan had arranged it that way to get maximum exposure for launching the first salvo in the government’s war on illegal backdating.
Then cut to August 7, when Reyes and Bonds once again made news on the same day, albeit in very different ways. Hours before Bonds scaled the heights of athletic achievement by overtaking Hank Aaron, Reyes was convicted on charges that could bring him up to 20 years in prison.
But if they had very different days on Tuesday, the similarities between Bonds and Reyes are more striking than the differences. First of all, Bonds is hardly out of the legal woods. Word is that he may still be indicted later this fall, if a grand jury finds he perjured himself while testifying in the BALCO case a few years back.
What other similarities are there? For one, Reyes and Bonds share a similar reputation within their industries. While Reyes’s salesman’s intensity has little in common with Bonds’ aloof demeanor, both are lightning rods for criticism--considered arrogant, imperious and self-centered by many in their circles. That could come back to bite Bonds, if it turns out that these traits led him to lie under oath. It may have already hurt Reyes. A critical piece of the case against him, say observers, is that he lied to an outside lawyer hired by the Brocade board back in 2004, by insisting that Brocade had not backdated grants on his watch. Sources close to him say Reyes was furious at the time--about the fact that the board had launched the probe, that they’d done so without notifying him, and that he’d been cut off from any information about its progress in the nerve-wracking weeks that followed.
Of course, being one of the first people to go through one of these backdating investigations meant Reyes lacked a critical piece of information as he answered the lawyer’s questions: he had no reason to think his words might one day be used against him in a Federal Courtroom (In fact, Reyes didn’t even have a lawyer with him at the first of these interviews). By the following year, the drill was clear to most companies: the SEC and the DOJ were watching, so it was best to come clean at all costs. But if Reyes did lie (and his backers question this, pointing out that the lawyer didn't write up a memo about what he heard in those interviews until over a year later), he may pay for it dearly. If he'd told the truth then, his lawyers would have had a much easier time making their case that he knew backdating occurred, but had no idea the company was improperly accounting for them.
Here’s another similarity between Bonds and Reyes: the evolving view of the underlying violations that got them into trouble. Both steroid use and backdating, while always considered sleazy, were common practice back in the day. Both enjoyed a similar form of tacit support from the wider world. Major League Baseball, having heard few complaints from fans who had fallen in love with the long ball, refused to investigate abuse of performance enhancing drugs long after there was evidence of its existence. And until Sarbanes Oxley went into effect in 2004, options enjoyed similar immunity. Let’s not forget that before the Net Bust, aggressive use of options was championed as a best practice by many on Wall Street and millions of day traders. Taking full advantage of this powerful weapon for hiring top talent at no upfront cost was a hallmark of a winner--a New Economy innovator willing to “break the rules” by eschewing hidebound compensation practices.
Of course, it was never okay to “break the laws”--not then, and not now. But what about ignorance of the law? Personally, I find it hard to believe any major leaguer didn't know taking steroids was illegal. But executives have more of a case in this regard. While I'm sure they knew it was sleazy, I find it hard to believe that nearly 200 companies decided to knowingly break the law (That's why most white collar scandals are typically limited to one or a small number of companies--because not that many executives are willing to put their cush jobs, reputations and freedom on the line). What tech execs did know is that employees were hard to find and retain at the time, and that competitors were hunting for every options-related edge to win them away. “Look, a lot of people knew [backdating] wasn’t fully kosher at the time. But at some companies, it wasn’t viewed as an unacceptable practice,” says Warmenhoven, who says this was never the case at NetApp.
While Warmenhoven is a long-time friend of Reyes and a vocal critic of the media and government focus on backdating, he isn’t ready to fully exonerate Reyes of all wrong-doing. He figures Brocade employed iffy practices--but only with the aim of growing the company and raising its stock price. In other words, he does not believe Reyes knowingly conspired to fleece investors by hiding expenses from them. “He probably didn’t even ask if the [backdated grants] were accounted for properly. Not even the auditors and lawyers were asking about that at the time, so why should the CEO?”
The jury that convicted Reyes felt otherwise, clearly--and barring a successful appeal, theirs is the only opinion that matters. Which begs one last question with Bondsian overtones: what should the punishment for these crimes be? Public outrage over steroid use certainly has hurt Bonds in the court of public opinion. But so far, only one person is behind bars, Bond’s former trainer Greg Anderson. As for backdating, there's not much data to go on. Former TakeTwo CEO Ryan Brant just received five years probation and no jail time the other day on backdating-related charges, but he plead guilty. We'll get the first data point as to what happens to a defendant that professes innocence on Nov. 21, when Reyes is sentenced.