Why the judge ratified Reyes’s conviction
Shortly after the jury returned its verdict yesterday, convicting former Brocade (BRCD) CEO Greg Reyes of all ten felony counts charged in connection with options backdating at that company, Judge Charles Breyer made public his ruling confirming that there was sufficient evidence for the jury legally to have done so. The 11-page opinion, available here, seems to seal off a couple avenues of legal escape that those charged with backdating had hoped to invoke to avoid finding their fates in jurors’ hands.
Back on July 3, at the end of the prosecution’s case, Judge Breyer reserved decision on Reyes’s motion for a judicially-ordered acquittal, evidently assessing the evidence of Reyes’s criminal intent at the time as so thin as to border upon the legally insufficient. He took the motion under advisement while the defense presented its case and, then, continued doing so while the jury deliberated. He made up his mind on August 3, when he signed the order, though he did not file it publicly until after the jury spoke yesterday.
In the opinion, Breyer discusses both the issue of materiality (i.e., whether the non-cash expenses avoided through backdating were the sort of thing a reasonable investor even cared about) and the issue of criminal intent (did Reyes understand that backdating was wrong). On a motion like this, the judge is not supposed to decide how he himself would have voted had he been on the jury, but merely whether “a reasonable juror” could vote to convict, based on the evidence presented.
He seemed to find “materiality” the easier issue of the two questions to resolve. The prosecution didn’t have to prove, he said, that the additional non-cash expenses that were concealed through backdating would have changed an investor’s decision about whether to buy or sell the stock, but merely that a reasonable investor would have viewed that information as “as having significantly altered the ‘total mix’ of information made available.” He cited the testimony of a Fidelity analyst, who said that his firm looks unfavorably on any company that grants in-the-money options, since such options don’t motivate employees the way options are supposed to. A second analyst had also testified, in Breyer’s paraphrasing, said that “non-cash expenses, though perhaps not the most important metric of a company’s value or performance, were nonetheless pertinent to his investment decisions.”
Ultimately, Breyer’s verdict on materiality was a common sensical one: “If investors really did not care about the compensation expenses created by stock options,” he wrote, “the jury would be entitled to ask why the company went to the trouble of pricing them retrospectively, rather than just granting options in-the-money and accepting the accompanying accounting charge. If investors truly did not care about non-cash compensation expenses, then why bother to keep them off the books?”
When it came to the tougher question — whether a reasonable juror could find that Reyes’s criminal intent had been proven beyond a reasonable doubt — Breyer listed all the pieces of evidence weighing against Reyes, beginning with testimony that Reyes had baldly lied about the company’s retrospective pricing policy to the attorney conducting the company’s internal investigation in late 2004 and early 2005. Maybe the most stern and striking entry in Breyer’s list of evidence was his inclusion of the simple fact that Reyes had signed the firm’s financial statements, which somewhere included a line stating that the company had accounted for stock options in accordance with Accounting Principles Board Opinion 25, “whereby the difference between the exercise price and the fair market value at the date of grant is recognized as compensation expense.” Breyer’s unforgiving judgment: “Although a jury could view Reyes’ knowledge about the precise contents of these documents with skepticism, given his supervisory role as CEO, it would also be reasonable for a jury to infer from his approval of these documents that Reyes understood the accounting treatment of stock options described therein.”
While signing an inaccurate financial statement may not alone be sufficient to convict a CEO, it has consequences, and evidently helps take his case to the jury.
Sounds right to me. What do other people think?
once a jury decided thats final in all charges its not the judge to decide otherwise his job is to determine the sentence
mike
I have a problem with Breyer’s ratification of criminal intent. The MoFo witness had no transcript or recording of what transpired, it was just sense, or a recollection. Reyes could have been speaking from within a specific context, such has backdated options for EXECUTIVES which are handled differently than rank and file under sox, when he denied backdating- we will never know, because again, there is no transcript. Breyer then goes on to say that since Reyes signed financial statements referring to GAAP adherence… ok, so there is the MoFo testimony with no transcript and signed financial statements. This is enough to send a CEO away for 20 years? Not in my book. This is an acquittal.
This is heresy. A CEO going down for up to 20 years for misrepresenting non-cash expenses, where there is at least a reasonable doubt that he didn’t know he was misrepresenting anything. A disgusting verdict and vindictive jury. This should have been tossed with the rule 29, and Breyers explanations why it wasn’t are pretty lukewarm. This is a CRIMINAL case, remember.
Thanks Thomas T and dot for your intelligent posts.
To compare this case to Enron and Worldcom is shameful. Last time I checked BRCD was still a going concern. Moreover, the CEO did not enrich himself in this so-called “scheme”. And why isn’t the CFO being held accountable? Isn’t accounting his responsibility? I believe he was the prosecution’s star witness.
I lost several hundred grand in the market myself in the dot com era. Do I blame the companies? No. I didn’t sell soon enough. I suspect the same can be said for everyone else.
no one lost $ because of this “scheme” These actions did not lead to bubble bursting or 9/11- both of which took the market south. As an investor I want the team to get best and brightest to work at my company. He did not do this to make himself $, but to make company more competitive.
Ted–
I think you’re right, but I’m out of my depth there. Maybe a knowledgeable reader could weigh in on that?
Roger, doesn’t granting options in the money create tax consequences for the employees and employers? There are financial reasons for backdating aside from pulling the wool over stockholders’ eyes: it permits the corporation to offer more after-tax compensation to its employees at a lower after-tax price to its shareholders. Of course, whether that means there are other legal problems with backdating is another issue.
If it is clear that “these scams that have been engineered for the sole purpose of enriching the executives of a company” as Debby C posted, then yes, convict the hell out of ‘em. However, this does not appear to be an Enron, Tyco, Worldcom. This activity was a common practice in the valley for options granted to ALL employees, not just executives. Reyes did not write himself loans, or self-approve “in the money” options for himself. He was going after the best and the brightest for the team at BRCD. This is not a cut-and-dried case of a greedy executive only looking out for himself, and to send the man to jail for decades is not fair. If people want to blame backdating options for their personal losses, then dig a hole in the sand and insert head. I believe that the real blame was, as has been said before, Irrational Exuberance…
Breyer for president. It is past time that CROOKS get their JUSTICE reward.
i guess my loss of $830,000 on BRCD stock based in large part on the rosy financials painted by the CEO was nothing more than a pyramid scheme gamed by the crooks. When all is said and done, i doubt i will see a class action settlement suit worth more than $100 to me.
While the defese may try to claim that there was no material effect to the investors; we should look at the investors for Worldcom, Enron, Tyco, Brocade and an ever increasing number of companies. This clearly causes harm when people lose thier lifes savings in these scams that have been engineered for the sole purpose of enriching the executives of a company. If we are to believe the excuse put forth by the defense then they are claiming that there is no reason for financial statements that many investors rely on.
What are our options if we lost $150,000.00 because of Reyes’s lies.
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This blog is about legal issues that matter to business people, and it's geared for nonlawyers and lawyers alike. Roger Parloff is Fortune magazine's senior editor (legal affairs). He practiced law for five years in Manhattan before becoming a full-time journalist.
Mike, I know the jury decides and thats fine for the rule 29 motion but a new trial should have been granted because the prosecutors blatantly lied in their closing arguments that Reyes hid the practice of backdating from the CFO and finance dept (which was obviously not the case given that the CFO was charged one week after the trial). This is a pretty key element to this trial, whether the finance professionals “missed” the charge or whether Reyes intentionally hid the practice and lying to the jury on this is not a trivial matter nonetheless Breyer did not toss the case. In this case it is the judges rulings, not the juries that are a little suspect. The jury is just a typical post-Enron jury out for blood for any white collar crime no matter the reasonable doubt.