Trial against ex-Brocade chief allowed to continue

A judge Monday allowed trial to proceed for former Brocade Communications Systems Inc. Chief Executive Gregory Reyes while he considers whether to dismiss charges against the first CEO prosecuted for stock option backdating.

U.S. District Judge Charles Breyer in San Francisco said he probably would decide July 19 whether to throw the case out. Breyer said he would review a report he requested from the government about whether there was evidence that Reyes, 44, understood accounting rules about stock option grants or acted recklessly in his handling of them.

Reyes, who led San Jose-based Brocade until 2005, faces 10 counts, including conspiracy, fraud and making false regulatory filings. He’s accused of improperly backdating options and falsifying board meeting minutes to inflate Brocade’s financial results.

He’s the first corporate executive tried for backdating, and a dismissal could undermine government efforts to prosecute others over the practice.

On Friday, Breyer questioned whether prosecutors had proved that Reyes understood accounting rules requiring companies to subtract stock option grant expenses from financial results if the grants were backdated.

The government said in a filing Monday that it didn’t need to prove Reyes knew he was breaking the law or that he was familiar with the accounting rules in question, only that he knew he was doing something wrong.

“Did the defendant do something he knew was wrongful?” prosecutors wrote in court papers. “Yes, he falsified Brocade’s stock-option grant minutes and then lied about it.” That is “legally sufficient proof that he acted with an intent to do something wrong,” the government said.

Stock options allow holders to buy shares at a later date, usually at the trading price on the day they were granted. Through backdating, companies change the grant date to a day with a lower stock price, giving recipients built-in profits.

Unless disclosed and recorded as an expense, the practice is illegal because it hides costs from shareholders and regulators.

The government wrapped up its case July 2. Richard Marmaro, Reyes’ attorney, began presenting the defense case Monday.