The Wall Street Journal-20080117-Brocade Ex-CEO Gets 21 Months in Prison
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Brocade Ex-CEO Gets 21 Months in Prison
Gregory Reyes, the former chief executive of Brocade Communications Systems Inc., was sentenced to 21 months in prison and ordered to pay a $15 million fine for backdating stock options.
Mr. Reyes was the first executive to go on trial and be convicted over the improper dating of stock-option awards, which dozens of companies have acknowledged since the practice came to light in 2006.
To date, 17 executives at eight companies have been charged with criminal offenses related to backdating. Eight have pleaded guilty, and one has fled to Namibia and is fighting extradition to the U.S. Two -- Mr. Reyes and former Brocade Human Resources Director Stephanie Jensen -- have been convicted at trial.
A stock option gives its holder the right to buy shares at a future date at a fixed price, usually the market price on the date of the grant. If the stock later rises, the recipient can cash in the option for a profit. By backdating a grant to a prior date when the price was lower, the award's value increases and the option is instantly in the money.
Mr. Reyes was convicted of backdating charges in San Francisco federal court in August, when a jury found him guilty of 10 counts, including fraud and filing false financial statements. Last month, Ms. Jensen was convicted of conspiracy and falsifying corporate records at Brocade, a San Jose, Calif., company that makes data-storage networking products.
Prosecutors and defense lawyers who handle white-collar criminal cases have been watching the Reyes trial for an indication of how future options cases will play out. The 21-month sentence -- relatively light for a large securities-fraud case -- was a good sign for defendants, said Jan Handzlik, a partner at the law firm Howrey. "The judge's sentencing here is reasonable and moderate," Mr. Handzlik said.
Mr. Reyes has hired Seth Waxman, a top appellate lawyer who often appears before the Supreme Court, to work on an appeal. U.S. District Court Judge Charles Breyer delayed the start of Mr. Reyes's prison sentence and payment of his fine until after an appeal is decided.
Mr. Reyes received the harshest backdating sentence to date. He faced as many as 20 years in prison, but the potential sentence was reduced late last year when Judge Breyer ruled there was no quantifiable loss of money to the company. As a result, prosecutors asked for a sentence of 30 to 33 months.
Judge Breyer said he had been prepared to hand down a sentence of 15 months. But he said Mr. Reyes made misleading statements in early filings. Prosecutors also asked for a fine for Mr. Reyes exceeding $41 million, in addition to $89 million in restitution to the company. But Judge Breyer said he found the request excessive and said he was hesitant to award restitution, since the company will likely sue its ex-CEO.
Prosecutors and San Francisco U.S. Attorney Joseph Russoniello declined to comment on the case. A Brocade spokeswoman also declined to comment.
