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August 7, 2007 9:43 pm
Gregory Reyes, the former chief executive of Brocade Communications, was convicted on Tuesday of conspiracy and fraud in connection with back-dating stock options in the first time a jury has considered charges connected to the scandal.
The San Francisco federal jury found Mr Reyes, 44, guilty on all 10 counts after a six week trial.
Prosecutors alleged he and the company misled shareholders for more than four years by backdating stock grants to the lowest price available and understating their cost to the company.
The guilty verdict is a big victory for the government and the San Francisco US attorney’s office, which had been struggling to keep up with the sheer volume of options backdating cases.
The result also serves as a shot across the bow of dozens of other current and former corporate executives who are under investigation by the justice department and the Securities and Exchange Commission in connection with backdated options.
Nearly 200 companies have announced internal or government probes of their options practices, and some lawyers have argued the practice was so widespread that it would be impossible for the government to prove the executives involved knew what they were doing was wrong.
After the verdict, Charles Breyer, the judge in the case, said he turned down a defence request to have the case thrown out because of a lack of intent.
Richard Marmaro, Mr Reyes’ attorney, could not be reached for comment but he told Bloomberg News that his reaction to the verdict was “total shock”, and said his client planned to appeal.
Brocade, which makes computer switches, ousted Mr Reyes in 2005, and the company restated its earnings. The San Jose-based company agreed in May to pay $7m to settle an SEC investigation into its options practices.
Prosecutors told the jury that Mr Reyes and the company routinely provided extra compensation to employees by backdating options and altered documents to hide the practice.
Several former corporate executives at other companies have already pleaded guilty to fraud charges in the options scandal. Mr Reyes, who did not personally benefit from the backdating at Brocade, was the first defendant to take his case to trial.
“It sends a message that perhaps some of this stuff is really bad. It’s not just technical,” said Henry Hu, a University of Texas law professor. “It increases the bargaining power of the SEC and the justice department.”
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