Two mail fraud charges were later dropped for both defendants. By keeping the charges off the company's financial records, prosecutors argued, the executives misled investors about the true profitability of San Jose, Calif.-based Brocade, which makes switches and software used to connect corporate servers and data storage systems. Attorney Tim Crudo countered that the government doesn't have to prove that Reyes knew which securities laws he was breaking, just that he knew what he was doing was wrong.
Some defense witnesses testified that options-related expenses weren't even relevant in calculating Brocade's core profitability and measuring the success of its operations. He said Reyes knew Brocade's financial reports and board meeting records were incorrect but signed them anyway and that he also lied to auditors about the company's options practices.
The government has reportedly been looking at filing criminal charges against former executives at Apple Inc., KLA-Tencor Corp. — companies that have all acknowledged stock options shenanigans.
Reyes was charged with 10 felony counts of securities fraud; prosecutors accused him of doctoring company records and lying to investors and auditors about the company's options practices to falsely boost Brocade's profit.
Reyes was charged last summer with 12 felony counts of securities fraud and other offenses.
Brocade's former vice president of human resources, Stephanie Jensen, was also charged with 12 counts. The government alleges the two illegally concealed that Brocade was awarding "in the money" grants — or options that already had value when they were given, thus requiring the company to incur compensation expenses.
Backdating means retroactively pricing option grants on days a company’s stock price was low, to lock in financial gains.
He was sentenced to 18 months in prison and a million fine.This is a big deal in Justice Department-land: a deliberate misconduct finding triggers an investigation from DOJ’s Office of Professional Responsibility, which falls somewhere between root canal and colonoscopy on a federal prosecutor’s list of preferred procedures. attorney spokesman didn’t immediately respond to an email, nor did Crudo, who has since returned to a Latham & Watkins partnership.Today, the court issued an amended order, but it only made a factual change; it didn’t strike the word deliberate. Prosecutors said Reyes intentionally kept compensation expenses associated with Brocade's options awards off the company's books.His defense team argued he didn't understand the accounting implications and relied on Brocade's financial department to properly record the expense.