Reyes is the first Silicon Valley executive to face criminal charges for stock option fraud, resulting from Brocade’s back dating of employee’s stock options, and his trial in San Francisco began last month.
During the first week of the trial the prosecution apparently scored a major victory when a former employee of Brocade’s HR department told the court that Reyes had told her that option back dating was not illegal if you don’t get caught. Although the witness could not remember the exact context of the alleged comment, her evidence undermined the defense argument that no Brocade employees had ever knowingly committed securities fraud. She also told the court that another senior Brocade executive had told her never to make any references to back-dating in emails.
But according to reports in the Legal Intelligencer and the Mercury News, the tables were turned last week. Defense lawyers managed to use a witness called by the prosecution to bring to light an argument until then kept out of the court room – that Brocade is only one of dozens of companies that back-dated stock options. Statements from the same witness also implicitly backed another defense argument that back-dating does not always harm stockholders.
The witness was Steve Catrick, an analyst at Delaware Investments, which had owned Brocade stock. The judge allowed defense lawyers to ask Catrick about his firm’s holdings in other companies with stock option issues, which included Broadcom, Barnes and Noble, and Home Depot. Catrick admitted that Delaware Investments held onto those companies’ stock even after their stock option issues surfaced, and admitted that BroadCom’s share price rose after it restated its results to take account of $2bn of non-cash stock option expenses.
A spokesperson for the law firm representing Reyes said that the cross-examination of defense witnesses will take another three to four weeks. During this period the defense will try to hammer home its opening arguments that the back-dating completed at Brocade was done openly, was a common practices in many US businesses, that no Brocade employees were aware of any wrongdoing, and that back-dating does not in any case constitute securities fraud.
