Legal News

The Reyes Prosecution, Take Two

By Ashby Jones

It must seem like deja vu all over again for former Brocade CEO Greg Reyes (pictured). Back in 2007, he stood trial on conspiracy and fraud charges for allegedly backdating employee stock options.

He was convicted, his conviction was reversed, federal prosecutors decided to retry him. And here we are, right back where we started from.

But at least one thing’s different in this go-round: the personalities. For starters, gone is Reyes’s defense lawyer, Skadden’s Richard Marmaro. Taking his place: Cooley Godward’s Stephen Neal.

And Neal intimated during his opening arguments on Monday that his defense might look a bit different than Marmaro’s. According to the Recorder’s Dan Levine, Neal during his opening argument claimed that Reyes could not be convicted of illegal stock option backdating because Brocade’s outside counsel at Wilson Sonsini had signed off on the practice. Click here for the San Jose Mercury News’s article on Day 1.

Wilson’s chairman, Larry Sonsini, sat on Brocade’s board, said Neal. And Sonsini himself received backdated stock options, according to Neal. “Larry Sonsini, and the audit committee, and the directors of this company, knew backdating was taking place,” Neal said. In other words, if lawyers knew what was going on and were okay with it, then Reyes could not have had the intent to commit fraud.

Sonsini, it seems, disagrees with this take. According to the Recorder, in a deposition taken before the first trial, Sonsini acknowledged signing documents that delivered a huge grant to employees and others in April 2001. But Sonsini told Marmaro in the deposition he had no idea those grants were backdated. Marmaro never called Sonsini to the stand in the first trial, and Neal did not reveal his intentions to the jury on Monday.

During his opening on Monday, Assistant U.S. Attorney Adam Reeves stressed that Reyes himself received backdated options. He undertook the scheme in order to “pad his own pocket,” Reeves said.

Backdating, without more, is not illegal. But the government says Reyes tried to cover up the backdated options that Brocade issued to many employees, including Reyes himself.

“Mr. Reyes wanted to lock in the potential profit for himself and those around him,” while “making the company look more profitable than it really was,” Reeves told jurors. “It was simple, it was ingenious and it was a total fraud.”

Full post as published by Law Blog - WSJ.com on February 23, 2010 (boomark / email).