Backdating Conviction of Brocade's Reyes Overturned - 19 Aug 2009

By PHILIP SHISHKIN

A federal appeals court overturned the conviction of Gregory Reyes, the former chief executive of Brocade Communications Systems Inc., and accused prosecutors of lying during Mr. Reyes's landmark 2007 stock-options backdating trial.

In the trial, a jury found Mr. Reyes guilty of securities fraud and
conspiracy charges for his alleged role in manipulating the dates of
stock-option grants given to Brocade employees.

Options give their holders the right to buy a stock from a company
at a fixed price, enabling them to profit by selling the stock for more
when it rises in value in the open market. Options are typically priced
at fair market value at the time of grant -- but in backdating, they
are priced at a prior date when the shares were lower, giving the
holder greater profit potential. Such options are legal as long as they
are disclosed properly and the backdating advantage to holders is
recognized as an expense -- but a scandal that erupted in 2006 showed
that dozens of companies hadn't disclosed the practice or taken the
proper charges.

Mr. Reyes's 2007 conviction was the first of its kind and was widely
seen as a victory in the government's crackdown on backdating. In
throwing out the conviction, the appeals court didn't dispute that
backdating took place or that Mr. Reyes played a key role in awarding
such grants to valued employees. But the court said that Brocade's
finance department was aware of the practice and that prosecutors knew
it. In telling the jury that the finance department didn't know, the
government committed "prosecutorial misconduct," the appeals court
ruled.

"At trial, an issue as to Reyes's criminal state of mind was whether
Reyes knew the corporate records falsely stated the company's financial
condition by underreporting the company's expenses," the appeals judges
said. "Reyes's defense was that he thought the transactions were
properly accounted for, in reliance on the finance department's
expertise to comply with accounting principles" and Securities and
Exchange Commission regulations.

The appeals judges found that prosecutors ignored exculpatory
evidence from some finance-department employees who told investigators
that the department knew backdating was taking place, which would have
bolstered Mr. Reyes's contention that he believed

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