Judge Could Dismiss Criminal Backdating Case Against Reyes

The first criminal stock-options backdating trial, being held in San Francisco, could end ignominiously for the prosecution.

As of this afternoon, the Wall Street Journal reported (sorry, but they charge for content, at least until Rupert Murdoch acquires them) that U.S. District Judge Charles Breyer has taken a defense motion under advisement to dismiss the case against Gregory L. Reyes, Brocade Communication Inc’s former CEO, for lack of evidence.

Reyes, once a high-flier in Silicon Valley, is accused of defrauding shareholders between 2000 and 2004 by regularly altering (otherwise known as backdating) the grant dates of stock options awarded to employees. He also has been accused of falsifying documents to cover up the scheme.

The defense argues the prosecution hasn’t made a convincing argument to support its case, which explains the motion to have the judge dismiss it. What follows is a brief excerpt from the Wall Street Journal article:

Defense attorneys last week filed a motion arguing that the government had failed to prove that Mr. Reyes understood the accounting implications of backdating or that he had tried to deceive or cheat Brocade’s shareholders, and that the case therefore shouldn’t go to the jury. The prosecution’s "evidence has uniformly shown that the principal goal in administering the stock option program was to recruit and retain talented employees for the good of Brocade and its shareholders," the defense said.

I am no legal expert, not even close, but I toiled professionally in the information-technology industry during the period in question. As such, I can tell you that what the defense is saying has more than a ring of truth to it. There was intense competition to sign and retain executive, managerial, and engineering talent during the frothiest years of the boom, and it was not unusual for the egos and remuneration packages of existing and prospective employees to expand dizzily during the height of the frenzy. For the best and the brightest talent on the market, it was as close to being a cosseted professional athlete as geeks would get. Ahh, those were the halcyon days.

Of course, for the vendors, such as Brocade in the storage-networking market, that meant having to make increasingly aggressive compensation offers to keep and attract top personnel. At the time, vendors really did believe that making such aggressive offers, which might include the practice now commonly understood as stock-option backdating, was in the competitive interest of the company and in the long-term interest of shareholders. It was endemic behavior. There was madness in the air, and nearly everybody contracted the contagion.

Yes, I would not be surprised in the least to see the case dismissed and Mr. Reyes go free.

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