Securities Law

Backdating Defense Takes a Blow

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The defense of the ex-CEO of Brocade Communications suffered a setback yesterday, when a witness was allowed to testify about a statement acknowledging that stock options backdating is wrong.

June Weaver, who had worked in Brocade’s human resources department, testified that ex-CEO Gregory Reyes once told her, “It’s not illegal if you don’t get caught,” the Recorder reports.

Lawyers for Reyes maintained in opening arguments at the San Francisco trial that their client was unaware that backdating is illegal.

Under questioning by federal prosecutor Adam Reeves, Weaver said she couldn’t remember if the conversation related to backdating, but she assumed it did. Weaver said the conversation occurred when she was alone with Reyes in her office, and backdating was the only matter they discussed when alone.

After Weaver testified, Reyes’ attorney, Richard Marmaro, asked for a mistrial, saying the testimony should not have been allowed because of doubts about the context.

On Tuesday Marmaro had protested that prosecutors had not told him about the witness’s statement in advance of trial. Later, though, he said a review of FBI notes he received weeks before trial contained a mention of the witness’s recollection of the statement.

Reyes is the first executive to be charged with securities fraud for backdating stock options to make them more lucrative for employees.

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