On the third day of the trial that began this week, a witness told the jury that Reyes told her during a private conversation that the back-dating of stock options in order to increase their value was not illegal if you don’t get caught, according to reports.
That statement entirely contradicted Reyes’ defense lawyers’ opening argument that neither the ex-chief nor anybody else at the company knowingly committed securities fraud.
Reyes is the first executive to face charges in what the US Department of Justice billed last summer as a campaign to stamp out the poisonous practice of re-dating stock options in order to make them more valuable to employees, which it says has been rife in Silicon Valley.
The ex-CEO has pleaded not guilty to all ten charges of fraud which relate to a period between 1999 and 2004, but if convicted he could face a jail sentence of up to twenty years, and fine of up to $5m.
Other Silicon Valley executives facing charges are Reye’s colleague and former Brocade vice president of human resources Stephanie Jensen. Executives at Mercury – now a part of Hewlett-Packard – are also facing stock-option and other fraud charges. Brocade itself has recently paid a settlement of $7m to the DoJ, while HP has paid civil penalties of $28m.
The witness who claimed that Reyes had told her that only those that get caught are guilty was June Weaver, who worked in Brocade’s HR department. Reyes’ lawyers first attempted to block her testimony by arguing that it had only been partially revealed to them during evidence discovery, and that Weaver could not remember exactly when Reyes made the statement.
But Weaver was allowed to testify, and told the court that she remembered what Reyes said very well, according to reports.
The defense tried to undermine Weaver’s credibility by focusing on her knowledge of accounting and stock option issued during cross-examination, and by asking her if she blamed Reyes for the fact that she was laid off from the company in 2004.
Earlier in the week another ex-employee of Brocade’s HR department gave evidence that part of her job was to pick good past dates on which Brocade’s stock price was lowest, to attach to stock options. She said that on one occasion she sent Jensen an email about an issue related to the option grants. Only minutes later Jensen came into my office, my cube (cubicle) and informed me not to document information like this over e-mail in the future, Burgess said.
The defense response to this was to present emails that Burgess had written after that date, which showed that if Burgess ever was given such verbal advice, she had forgotten it.
Our View
The US government must be admired for taking such a strong stand to protect the efficient and fair operation of the financial mechanisms that underpin the US economy.
But the anti-stock option fraud campaign is already facing the same sort of over-kill criticism than was generated by the Sarbanes-Oxley response to the WorldCom and Enron accounting scandals.
One Silicon Valley chief who has publicly condemned the DoJ’s campaign as a witch hunt is Network Appliance CEO Dan Warmenhoven, who last year said that is doing more to harm than good to investor confidence.
Nevertheless a conviction of Reyes may encourage the DoJ to make some more examples of Silicon Valley chiefs. At least a few will be watching this trial with more than a little concern.
