Brocade Ex-CEO Guilty of Fraud, Conspiracy in Backdating Case

Federal prosecutors have drawn first blood in the stock options backdating scandal. Following a five-week trial, Gregory L. Reyes, the former CEO of Brocade Communications Systems, was convicted of 10 counts of conspiracy and fraud in Federal District Court in San Francisco.

Reyes could receive a sentence as steep as 20 years in prison, as well a multimillion dollar fine, under federal guidelines. Sentencing is scheduled for Nov. 21.

At first, the stock options backdating issue appeared to be a matter for the Securities and Exchange Commission. The probe stemmed from an academic study that found an overwhelming number of coincidences between option grant dates and the days company stocks registered their lowest prices. Manipulating option grant dates is illegal if the discounts are not accounted for as an expense.

Gaining Momentum

Reyes’ conviction underscores the feds’ determination to fully prosecute the apparently rampant violations that occurred in Silicon Valley and other tech enclaves. Investigations were initiated into the practices of some 140 companies over the last year or so; most of those cases are still under SEC review.

However, the Justice Department has pursued criminal charges against at least five executives. The perception — before today — was that it would not be easy for prosecutors to win such cases, as they would have to prove a defendant knowingly committed a crime.

Pay Attention

Reyes’ conviction will, no doubt, make other executives keenly aware of the possibility that they could pay a serious price — financially and personally — for engaging in options backdating.

“Any time the government is successful in winning a white collar case like this, it makes business executives pay double attention,” William Leone, partner with Faegre & Benson and former United States Attorney for Colorado, told the E-Commerce Times.

“One thing significant about this case and the conviction is that it confirms the fact that it is possible for the government to obtain a conviction even when there is no direct personal profit,” he remarked.

Growing Call for Jail Time

Executives are also squirming over the growing public demand that white collar criminals do some hard time for their crimes.

Investors were asked for their opinions on a variety of topics — including white collar convictions, sentencing and ethical management — in a recent survey conducted by Pepperdine University’s Graziadio School of Business and Management.

Almost nine out of 10 (89 percent) respondents said that jail time should be mandatory for corporate officers or board members convicted of practices harmful to employees, investors and the public. In contrast, only 7 percent said jail time should not be a requirement. The rest were unsure.

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