First Backdating Conviction Brings Prison Term and $15 Million Fine
By THE ASSOCIATED PRESS
Published: January 17, 2008
SAN FRANCISCO (AP) — A former chief executive of Brocade Communications Systems was sentenced Wednesday to 21 months in prison for orchestrating a plan to tamper with the company’s records of stock option grants.
The executive, Gregory L. Reyes Jr., who led Brocade from 1998 to 2005, was also ordered to pay a $15 million fine. Judge Charles R. Breyer of Federal District Court in San Francisco said Mr. Reyes had obstructed justice in preparing for trial, which led to a stiffer sentence.
“This offense is about honesty,” Judge Breyer said. “Every time Gregory Reyes falsified documents, repeatedly, over a three-year period, he was lying. That is the core of the defendant’s criminal conduct.”
Mr. Reyes was the first executive to be tried over stock options backdating when his case went before a jury in San Francisco last June. He was convicted in August of 10 counts of securities fraud.
At least a dozen other executives have been charged in options dealings in an investigation that revealed widespread mishandling of a common compensation tool used to recruit and retain workers. About 200 companies have been the focus of Justice Department and Securities and Exchange Commission investigations. Many companies have had to restate their finances, leading to the ouster of dozens of corporate officers.
Brocade, which makes switches that connect companies’ servers to their data storage systems, wiped out hundreds of millions of dollars in previously reported profits from 1999 to 2004 after the inaccuracies came to light.
Mr. Reyes’s case was seen as a test of how seriously infractions of options-related securities laws would be punished. He cried while speaking to the judge before his sentencing.
“I’m sorry,” Mr. Reyes said, between sips of water and long pauses to compose himself. “There is much that I regret, and if I could turn back the clock, I would.”
Judge Breyer said the prison sentence and the fine were appropriate because of the potential for backdating schemes to harm the public’s trust in the accounting of public companies.
Mr. Reyes was released without bail. He will remain free until a federal appeals court hears the case.
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