[Corp. Watch] Rare conviction, prison time for CEO for stock fraud

[Corporation Watch]

Ex-Brocade CEO Sent to Prison for Stock Backdating

By Paul Elias

(Associated Press, June 24) -- A federal judge on Thursday sentenced Brocade Communications Inc.'s former CEO to 18 months in prison for failing to disclose -- and then covering up -- a plan to alter the date of stock-option grants so employees could reap greater compensation.

	U.S. District Judge Charles Breyer also fined Gregory Reyes $15 million. Reyes is to report to prison September 10. Reyes' lawyers said he is considering an appeal.

	A jury in March convicted Reyes of nine counts of fraud and making false statements, but acquitted him of a conspiracy charge. The jurors agreed with prosecutors who said Reyes backdated stock option grants so they had a lower price, enabling key employees to pocket more money when they bought and sold the stock.

	Backdating is legal but must be publicly disclosed because it affects the company's bottom line. Reyes failed to publicly disclose the backdating to the Securities and Exchange Commission (SEC), and then lied to investigators about his actions.

	Reyes was originally convicted of similar charges in 2008, but the 9th U.S. Circuit Court of Appeals uncovered prosecutorial misconduct and ordered a new trial. Brocade's former human resources manager Stephanie Jensen was convicted on similar charges at a separate trial in 2008.

	More than 400 family members, friends and other supporters wrote the judge letters urging leniency, citing Reyes community involvement and charitable donations. The judge called the support detailing Reyes' volunteer work and community involvement "remarkable," but "my primary duty is to protect the public and send a message."

	Breyer said Reyes lied to everyone who questioned him about the stock options, including in court.

	"It is important to realize that the integrity of the financial market is of great concern to millions of people," Breyer said. "That integrity rests on the shoulders of chief executive officers and chief financial officers being honest in their disclosures."

	Before the judge imposed the sentence, Reyes stood up to read a prepared statement, but he began crying so hard that his lawyer had to do it. The statement apologized to Reyes' family and friends for the emotional toll his case has taken on them, but it never directly addressed the backdating issue.

	"I am a shell of the man I once was," the statement said.

	Brocade, which makes switches that connect companies' servers to their data storage systems, paid $160 million to settle a class-action lawsuit filed by investors. They were angered that the company's failure to report the backdating scheme wiped out hundreds of millions of dollars in profits the company had reported for 1999 through 2004.

	The San Jose-based company also paid $7 million in 2007 to settle fraud charges alleged in a lawsuit filed by the SEC.