Former Brocade CEO Gets 10 Guilty Verdicts for Backdating Charges

August 8, 2007 ( - Former Brocade Communications CEO Gregory Reyes was convicted Tuesday on 10 felony counts relating to the backdating of stock options in the first backdating case to go to trial.

The convictions came as a shock to Reyes and his attorneys as the prosecution presented no evidence or testimony showing Reyes ordered option dates to be manipulated and presented little to prove he had knowledge of the accounting rules governing stock options, according to the legal news source The Recorder. Prosecutors relied on the fact that Reyes’ signature was on options documents as well as Securities and Exchange Commission (SEC) filings that said options were properly accounted for, the news report said.

Evidence was presented that in 2004 Reyes lied about backdating to a partner at a law firm investigating options improprieties for the company. However, Reyes’ defense team argued that the set of accounting guidelines that govern how to expense options is complicated and Reyes trusted the finance professionals used by the company to do things right, according to The Recorder.

Though Reyes was among the first of a string of executives to be indicted on charges of stock options backdating, he was only accused of altering dates, and not of profiting directly from the scheme. “It is surprising that in an area where the government is investigating at least 60 companies [over stock options], the government would choose to charge Mr. Reyes … All he did was what his board authorized him to do,” an attorney for Reyes said at the time (See Brocade Execs Among First to be Charged in Stock Option Probe ).

The judge disagreed with Reyes’ argument that investors do not pay attention to the way stock options are recorded on companies’ financial statements and refused a request to dismiss the case against him (See Ex-Brocade Exec’s Backdating Charges Dismissal Request Rejected ).

More than 150 firms were affected after the break of the stock options backdating scandal last year (See Scorecard: 153 Firms Snared in Options Scandal ).