CEO Convicted in 1st Backdating Case

Updated: In a result seen as a major victory for federal prosecutors, a jury in San Francisco today convicted the former CEO of Brocade Communications Systems Inc. of securities fraud in the first criminal stock options backdating case to go to trial.

Today's conviction of Gregory Reyes, 44, on 10 felony counts is expected to encourage the government to pursue other options backdating cases aggressively, including a possible prosecution concerning options backdating at Apple Inc., according to the Wall Street Journal (sub. req.) and San Jose Mercury News. At sentencing, which is scheduled for Nov. 21, Reyes faces potential prison time and possible seven-figure fines.

During testimony, which lasted five weeks, Reyes didn't contest that he had backdated stock options grants, or that they weren't properly recognized as compensation expenses in the company's accounting, the Journal article recounts. But the trial focused on whether he had known what the company was doing was wrong; his lawyers said he didn't.

As the Mercury News explains, "Backdating refers to the practice of changing the date on a stock option grant backward in time, typically when the stock price was lower, increasing the odds that the recipient could sell the stock at a profit. While the practice is not illegal, prosecutors said failing to disclose the change and its impact on the company's financial statements is fraudulent."

Although the case is a clear victory—so far—for the prosecution, a defense lawyer said it isn't over yet.

"To get a conviction with these facts, which weren't all that strong, will encourage the government to continue prosecuting backdating cases," Phillip Stern, a Chicago lawyer who formerly worked for the U.S. Securities and Exchange Commission, told the Journal.

"Today, we are disappointed. Tomorrow, we will continue the fight," said defense attorney Richard Marmaro in a written statement. "Greg Reyes is innocent and we are confident he will ultimately be exonerated."

(Originally posted at 5:06 p.m., central time.)