Brocade judge denies Reyes new trial in blunt terms

Stephanie Jensen has been convicted and faces 25 years. This is really just incredible. Where is the CFO, he is the problem.

As for what the justice dept is doing, trying to show that great wealth means staying inside the law- that would mean a lot more to me if they stayed inside the law themselves.

I would like to see Crudo and Reeves disbarred for their lying in the first Brocade trial leading the the bogus Breyer ruling. In this trial there is less information available so I can’t judge their integrity but that this point, my evaluation of the justice dept is fairly low. I guess we now see how the sentencing goes for all of these. Seems like Apple execs should be suiting up also.

There used to be something called ‘fiduciary responsibility’ in the corporate boardroom, leadership and positive role models coming from the frugal and hard-working behavior of company founders.

I suspect all that the Federal Government is trying to do, broadly conceived, through this trial and others, is remind everyone that having great wealth means having great responsibility to act in accordance with the law. And that white collar crime is not above the law.

I am certain that to an uneducated person who has shop-lifted three times and is looking at life in prison at San Quentin under California’s “3-strike rule”, the Federal government’s miniscule effort to regulate and police corporate directors offers no comfort in what is clearly a legal system which continues to punish the poor unfairly against the wealthy who can afford the likes of Larry Sonsini to act as guide and counselor.

It is sad that Brocade was singled out, but it is no different than a highway patrol pulling over the last car in a row of speeding violators and letting the rest go. That Greg’s defense is he was only cheating and defrauding shareholders the same way everyone else does in Silicon Valley is not only a poor defense, it is a sad statement about corporate governance and the absence of leadership in a valley which once counted great names such as Hewlett, Packard, Moore, Grove and Noyce.

It is probably saddest of all that we have heard absolutely nothing from Mr. Sonsini in this matter. He did sit on Greg’s board, he did advise him in governance matters, and he is one of the people who shaped the Silicon Valley we know today.

Mr. Sonsini– care to comment?

Perhaps he is afraid of guild by association.

In the Jensen trial it is pretty obvious the CFO and finance setup the options program at Brocade. She may still lose her case, because she did create the paperwork, but the CFO of Brocade set it up, and showed her how to create the documents, and backdate them. Then those were put on the CEOs desk to sign - and all the CEO did was sign them (sometimes they were stamped with his signature by underlings). The entire Jensen case comes down to HR vs Finance in Brocade options, with Finance playing a heavy role, from the beginning.

Therefore Breyer’s ruling (text below) seems incorrect. But what is more troubling is the prosecution obvious knowledge and overt lies in the Reyes case that Brocade finance “didn’t know a thing” about backdating at Brocade when they knew otherwise.

Hopefully our sad criminal justice system calls these prosecutors (Crudo and Reeves) on lying to a jury as officers of the court.

But Judge Breyer accepted the prosecutors’ argument that their position, the SEC’s, and the evidence were all consistent: by falsifying corporate minutes Reyes could have intended to deceive accounting and finance officials, even if, over time, some of those officials eventually came to realize, or should have come to realize, what was going on.

The Jensen trial is coming up and the government dropped most of the charges so now she only has 2 charges left (as opposed to 10 charges against the CEO).

Does anybody know what the motivation would be for the government to drop Jensen’s charges?

The CEO’s sentencing has been delayed until after her trial.

And for Diogenes, the obvious problem here is, CEOs DON’T PREPARE FINANCIAL STATEMENTS. CFOs do. And the CFO in this case received 800K backdated options whereas the CEO received none (we don’t know how much the VP HR received). So explain to me why the CEO and VP HR are charged CRIMINALLY and the CFO gets only a civil charge. This smells bad to all except for the riled up public falling for this charade- the jurors and yourself it seems like.

It is interesting to see how many people defend theft from a company and deceit of the company’s shareholders.

Backdating is theft and deceit pure and simple.

Breyer is correct in saying that if these Brocade wanted to grant in the money options all they had to do was disclose them (and pay the taxes).

There is a contingent of apologists in the valley who are fully supportive of
theft from the corporate treasury and deceit of the public shareholders.

“A juror in this case is confronted with a simple question,” he wrote. “Why backdate? . . . The most plausible answer is to hide expenses.”

He continued: “The only explanation . . . proferred by Reyes in this case — because Brocade wanted to obtain attract and retain talent . . . — is no true explanation at all. This explains why Brocade might have wanted to grant options with low strike prices, that is, at less than fair market value. But a company can give away options without backdating them. The chief purpose served by the act of backdating itself is to make the grants look as though they were granted at fair market value, and thereby to avoid a compensation charge.”

This is clearly an accounting and finance issue - which is the responsibility of the CFO and CEO - not the VP of HR. The CFO knew what was happening and had been a part of the “inner circle” making these decisions proven by email and folks that worked at Brocade at that time. Another slimley CFO (Antony Canova) gets away with it again - and now he is at another Silicon Valley company likely to do it again…He is “MR. POLITICS” - nailing this on the VP of HR.

I’m sure the reason Reyes has no remorse is because he is innocent of whatever crime the DOJ is claiming he did- what is it again? Oh yeah not EXPENSING in the money stock options against the income statement, even though Brocade overstated the “expense” from those same options in Footnotes in its financial statements- and the CFO didn’t know anything about this, until after the conviction of course when he was indicted for telling Reyes how to implement an option program (according to the Mercury news).

Reyes is not charged with causing the dot com bubble stock collapse or being an egomaniac. Brocade stock had no reaction to the charge of failing to expense backdated options- it had fallen long before in the dot com stock crash.

I have worked in Silicon Valley for 20 years and nobody ever expensed backdated stock option hiring bonuses. I have never heard of this “crime”, but I can say for sure that most big companies gave in the money stock hiring bonuses and as far as I know nobody ever expensed these things, mostly because nobody knew how to account for them. Everybody put them in the footnotes using Black Scholes, but then again- nobody cared.

I half expect the hysterics I see from individuals here crying every executive is a witch and should be burned. But I don’t expect it from a Federal Court and Judge.

The Harvard Law blog has a nice post today about how lax Delaware law has created this mess with Federal intrusion. I am going to seriously advise entrepreneurs to look into offshore operations unless this atmosphere reverses itself quickly- not just the stock options prosecutorial overreaching, but all non-cash expense witchhunting currently advocated by the feds.

Reyes is a convicted felon and received justice. His argument that only the CFO and Finance Department understood the accounting implications was ridiculous. Reyes has shown no remorse for his criminal conduct, which has cost Brocade millions and millions of dollars. His only regret is that he was caught. “It’s not illegal if you don’t get caught.” Well, Mr. Reyes, you got caught. Have fun in your orange jump suit.

“What I don’t understand is why the SEC would pick on Brocade and not go after one of the big companies that forced this behavior like Microsoft.”

I suspect the answer to this is because a few years ago when the issue of expensing stock options first started to hit the papers, Reyes was one of the few Silicon Valley CEOs to publicly defy these SOX requirements. I distinctly remember reading articles in the SJ Mercury in which Reyes was interviewed on the subject and made statements along the lines that he would never expense employee incentive stock options. This was long before the Brocade investigation became public.

He shot his mouth off and now has paid for it.

he knew that Reyes is innocent (because he did not have the “mens rea”) but he wanted to convict him anyway. To paraphrase the prosecutor, why on earth would you lie to the jury when you know you can prove guilt beyond reasonable doubt with the facts alone?

They knew they couldn’t get an honest conviction on this weak Reyes case, and the DOJ had hundreds of other backdating cases they wanted to initiate, the viability of which hinged on the resolution of the weak Reyes case.

So, the DOJ pulled a “Nifong”. They lied to the jury and introduced some inflammatory witnesses intended to issue sound bytes that the jury would react to, even if they were in no way related to this case. The DOJ used words like scheme and book-cooking repeatedly -and were the only participants in the trial to do so- so that eventually, even the judge picked up on the abusive terminology, and they got their conviction. What a sorry episode.

Can I ask a question?

Why is this judge ruling on why he thinks backdated options are being used (to hide expenses according to him), and HIS TAKE on whether the rationale provided by the Reyes on why to use them is accurate?

This case was supposed to be about whether Reyes had criminal intent in hiding the expenses related to backdated stock options. To prove that, the DOJ needed to show some sort of indication not that backdated options were granted or why, but that Reyes knew an accounting charge was involved that was negligent on Brocade’s books. To the best of my knowledge no evidence of intent to hide this accounting charge was provided in this court.

Reyes may have known Brocade was backdating, or he may not have or he may have not known early on and found out later- Who cares?? Backdating is legal. Once he knew, if he did know, did he conspire to hide these accounting charges? Where is this courts evidence that that happened? Not to mention the fact that with other larger companies also backdating with no expensing, Brocade could have conceivably assumed any interpretation of expensing was wrong based on the precedent of other larger companies in the valley such as Apple- from where Brocade was trying to recruit.

I find this evaluation of why stock options should or should be not used, by the members of this court particularly the judge and DOJ to be a sad farce. Here we have people on the taxpayer payroll “advising” why they think backdated stock options are used- to hide expenses according to them.

Sorry, as everyone in silicon valley knows - backdated stock options are used to create an “in the money” lock on that employee with an incentive to work towards the goals of the company for 4 years. Stock options and backdated stock options are absolutely the preferred method of building employee incentives, far far superior than just a lump sum hiring bonus. And they are certainly not used to hide expenses!

This judge has turned this case into a sad witchhunt and farce. He has ruled on the wrong issue- whether/why Reyes used backdated options and not the real issue which is accounting for them, and intent to defraud regarding an industry wide practice! Since this issue is supposed to be an accounting issue, the fact that the DOJ lied in its closing arguments regarding the role of the CFO is even more egregious.

Of course since Breyer is confused as to what is supposed to be on trial here- he thinks it is options USAGE and not options ACCOUNTING- no wonder he thinks DOJ lying about the CFOs role is irrelevant.

What a sad day for justice.

I have always felt that the granting of options was and is a ripoff to the shareholders in that it has a dislution effect upon the earning of the company. Management should be rewarded if the company or enterpise does well and it should be by the awarding of bonuses.
I do not know the full particulars of this particular case but I can tell you this and that is if we take punitive aftion against this individual than in all fairness we should investigate and hold responsible all and every individual that has been proven guilty of this options backdating. NO EXCEPTIONS

Hey Vox Populus, if you are concerned about CEO vs employee pay differential, then you should be siding with the DEFENSE on this case, did you know that? This case is about Reyes and Brocade granting in the money options as hiring bonuses to rank and file employees. It has nothing to do with executive compensation which is set by the BOD. Brocade was granting in the money options as hiring bonuses because everybody else was doing it, and if they didn’t do it they couldn’t hire the top candidates. What I don’t understand is why the SEC would pick on Brocade and not go after one of the big companies that forced this behavior like Microsoft. Brocade, a small company is a follower not a leader in this respect.

Another thing some commentators miss is that granting in the money stock options as a hiring bonus is completely different and much more beneficial to the company than just a cash signon bonus. Options have the effect of locking people in for 4 years, and align their interests with those of the company. Cash signon bonuses do not do that. The assumption is that Silicon Valley companies used options only to hide expenses and for no other reason, it is completely bogus.

Finally I would like to point out that this case has given a voice to a whole team of fairly reprehensible anti-business loudmouth commmentators (there is one blogger on WSJ that uses the term “CEO-nistas” that do not benefit the USA and its enterpreneurial culture as a whole.

The argument about Dr. Gulley’s study could be completely reversed. If Reyes was aware of massive backdating at Brocade, he should have known that a statistical study would have certainly shown it. The fact that he paid for the study could be an indication that he was not aware at least of the full extent of the problem. If fact, some of the documents that he supposedly signed had his signature forged of photocopied.

It seems to me that Judge Breyer took the prosecutor’s side on all the major issues, even if not proven beyond reasonable doubt.

I totally agree with the previous post. I would like to add that the prosecutor consciously lied to the jury in his closing arguments, when he said that Reyes hid the backdating from the CFO and the finance department. Using the same kind of inference Judge Breyer uses, one should conclude that the prosecutor lied because he knew that Reyes is innocent (because he did not have the “mens rea” but he wanted to convict him anyway. To paraphrase the prosecutor, why on earth would you lie to the jury when you know you can prove guilt beyond reasonable doubt with the facts alone?

Look back options are plain and simple stealing from real share holders who had to pay fair market price. The fines for these miscreants will never be enough. They shirked basic duty of doing good for the company.
CEO Vs employee pay differences are not large enough. Give us all a break.

The problem I have, is that in the closing arguments for the prosecution, the argument was that the finance professionals especially the CFO “didn’t know a thing” about the backdating oocurring and that the CEO and HR VP hid a clandestine scheme from the rest of the company.

Then, one week later the government filed against the CFO of Brocade for backdating saying he allowed it to happen, and the Mercury News ran a story with some emails about how the CFO was explaining to the CEO how to initiate a program where employees came on part time prior to really starting work to receive preferable grant dates. This is fairly damning evidence that the government contradicted their own closing arguments in the Reyes case, what is the legality of this?

Brocade was by no means the largest backdater in Silicon valley. That distinction would have to go to a really big company- and in fact, Brocade was trying to hire from Apple, another large company that backdated. So they got caught up in having to play ball in a system they did not invent in order to attract talent. I have a hard time with this as a felony and the governments behavior here bothers me. Prior to the ruling I was merely a passive viewer.