The first criminal trial arising out of the stock options backdating scandals, involving Brocade Communications Systems, Inc.’s former CEO, Gregory Reyes, began on Monday, June 18, 2007 in the United States District Court for the Northern District of California. Reyes is accused of intentionally falsifying board meeting minutes and disseminating false financial statements in order to conceal the backdating of stock options. In opening statements to the jury on Monday, defense counsel argued that Reyes believed in good faith — based on the advice of professionals that he was not equipped to challenge — that Brocade was properly accounting for stock options.
Although this trial is expected to continue for two months, Reyes’ ignorance defense has already been challenged by the testimony on Wednesday, June 20, 2007 of June Weaver, a former employee in the human resources department. Weaver testified that Reyes once shared with her his opinion that “it’s not illegal if you don’t get caught.” It is not clear to what Reyes was referring, and defense counsel on cross-examination appears to have established that Weaver does not remember the exact context of this comment. Nevertheless, Weaver has testified that the only conversations she had with Reyes involved Brocade’s stock options program.
Defense counsel objected that Weaver’s testimony was unfairly prejudicial and that prosecutors failed to timely disclose this problematic testimony to the defense. Judge Charles Breyer overruled these objections, but if Reyes is convicted, they will likely form the basis of an appeal.
Coincidentally, Judge Breyer is also handling the civil shareholder derivative actions arising out of alleged options backdating conduct. In what is perhaps a window into Judge Breyer’s view of backdating in general, he recently rejected, on fairness grounds, a proposed settlement in the civil case that awarded no monetary award to Brocade.
