On Tuesday, August 7, 2007, after more than a week of deliberations, the jury in the criminal trial of ex-Brocade CEO Greg Reyes returned a guilty verdict. The government had accused Reyes of violating federal securities laws by failing to properly account for backdating options, and this trial was the government’s first attempt to obtain a criminal conviction in an options backdating investigation. The trial was widely followed and may embolden prosecutors in other pending options backdating investigations.
Notably, the jury was not persuaded by Reyes’ defense that he had not knowingly violated the securities laws. Reyes had argued that he did not understand the complex accounting rules surrounding backdating conduct, and that he himself did not receive any backdated stock options. Nevertheless, the jury found that the government had established Reyes’ intent. The jury’s decision may have been influenced by the damaging testimony of a former Brocade human resources employee that Reyes had said, in the context of stock option compensation, that “it’s not illegal if you don’t get caught.” It also appears, based on the jury’s request that certain testimony be read back, that the jury may have been influenced by Reyes’ initial denial, during Brocade’s internal investigation, that any backdating had occurred. The jury may have taken a negative view of this initial denial given that Reyes conceded at trial that backdating had occurred.
In a further development, Judge Charles R. Breyer announced on August 7, 2007 that he had previously denied Reyes’ motion to dismiss. During trial, it had appeared that Judge Breyer was not convinced that the government had presented sufficient evidence to demonstrate that Reyes had knowingly broken any laws. Judge Breyer postponed his ruling to the end of trial, but there was speculation that Breyer might grant the motion to dismiss even if the jury returned a guilty verdict. That uncertainty was resolved when Judge Breyer announced that he had already denied the motion to dismiss, but had not released his decision to avoid improperly influencing the jury.
Reyes plans to file a motion to set aside the verdict, and, if this motion is denied, to file an appeal. Reyes is scheduled to be sentenced on November 21, 2007, and may face a sentence of up to 20 years in prison and a $5 million fine.
