Former Brocade Communications CEO Gregory Reyes may have a tough time winning a second round in his long legal battle with federal prosecutors on charges he rigged stock options during a five-year period.
During a hearing Tuesday in San Francisco, a three-judge federal appeals court panel appeared largely skeptical of Reyes’ key arguments for overturning the 2010 convictions, although they did signal the case posed complex questions that could muddy the outcome. Reyes is currently serving an 18-month federal prison sentence for nine counts of securities fraud and other charges related to allegations he illegally backdated options, inflating the company’s bottom line by nearly $1 billion.
“It is a very complex and interesting case,” 9th Circuit Judge Milan Smith said at the conclusion of nearly an hour of legal arguments.
The 9th Circuit is tackling Reyes’ case for a second time, having previously reversed his 2007 convictions because of government misconduct that tainted his first trial. Seeking to overturn his convictions at last year’s retrial and clear his record, Reyes’ lawyers again argue prosecutors violated ethical rules in their pursuit of the former Silicon Valley executive.
But the latest appeal focuses primarily on the argument that prosecutors failed to present evidence that would even support Reyes’ convictions, saying there was no proof in the retrial that the backdating allegations, even if true, would have mattered to “the reasonable investor.” In particular, defense lawyers say, the backdating conduct was not “material” to Brocade’s bottom line, making it impossible to show Reyes committed the crime of securities fraud.
The 9th Circuit panel, however, grilled Seth Waxman, Reyes’ lawyer and a former U.S. Solicitor General, on whether there is reason to question the jury’s conclusion that the options practices were relevant to the company’s performance. Judge Smith, for example, noted that the backdating amounted to a nearly $1 billion correction in the company’s financial statements.
“We’re talking about a really significant change in the earnings of the company if it had followed (financial reporting rules properly),” Smith said.
Judge Alegnon Marbley, another member of the panel, later pressed Waxman on the fact the jury already considered the defense’s arguments that the conduct was not “material.”
“Why should we disturb the jury’s verdict?” he asked at one point.
Waxman argued that even the prosecution’s own expert witnesses acknowledged they didn’t examine options as a factor in investing in Brocade. “There is no doubt a billion dollars is a big amount,” he said. “But we’re talking about a very unique type of earnings.”
Assistant U.S. Attorney Amber Rosen drew some skeptical questions as well, particularly on whether the government’s witnesses were in a position to provide enough proof that the conduct mattered to investors. But she insisted the jury verdict should hold up.
“There really is no basis for upsetting the jury’s findings here that there was materiality,” she told the judges.
Contact Howard Mintz at 408-286-0236.
