Aug. 7 (Bloomberg) -- Gregory Reyes, the former head of Brocade Communications Systems Inc., was found guilty of all charges in a trial over the improper backdating of stock option grants, becoming the first chief executive convicted by a jury in a broad U.S. crackdown on the practice.

Jurors today convicted Reyes, 44, of conspiracy and fraud after six days of deliberations in San Francisco federal court. Shares of Brocade, the largest maker of switches for data-storage networks, fell 5.5 percent to a six-month low. The ex-chief executive officer faces up to 20 years in prison on the most serious of the 10 counts he faces at his sentencing Nov. 21.

``This is a pretty big win for the government,'' said Peter Henning, a former federal prosecutor who teaches securities law at Wayne State University Law School in Detroit. ``It may well encourage more cases or push some investigations forward.''

The U.S. ensnared at least 50 companies in its probe of backdating, a practice by which companies change the grant date to a day with a lower stock price, giving recipients built-in profits when they exercise their right to buy stock. Unless disclosed and recorded as an expense, the practice is illegal because it hides costs, prosecutors said during the trial.

Reyes, who also faces millions of dollars in fines, lost a bid to have the conviction set aside when U.S. District Judge Charles Breyer, following the verdict, denied an earlier defense motion to throw out the case. The judge had questioned whether prosecutors presented enough evidence that Reyes understood accounting rules.

`Shock' and Appeal

``Total shock,'' said defense attorney Richard Marmaro when asked for his reaction to the verdict, reached by the three-man, nine-woman jury after a five-week trial. Marmaro said he would appeal. Reyes declined to comment as he left the courtroom.

In an e-mailed statement after the verdict, Marmaro said ``Reyes is innocent and we are confident he will ultimately be exonerated. At all times, he acted in the best interests of the employees and shareholders of Brocade.''

Interim San Francisco U.S. Attorney Scott Schools said after the verdict that ``the jury took a considerable amount of time to deliver a verdict. The system worked.''

Asked whether other backdating indictments might follow, Schools said, ``every case stands on its own facts.''

Stephanie Jensen, Brocade's former head of human resources, was charged along with Reyes and will be tried separately at an unspecified date. Defense attorney Jan Little didn't return a call seeking comment.

Other Companies

Patti Tay, a former Take-Two Interactive Software Inc. accounting chief, one of three executives who pleaded guilty in a stock-option backdating investigation at that company, was sentenced to probation Aug. 2 in New York state court in Manhattan. Prosecutors made a no-jail agreement with Tay in return for a promise to cooperate in the investigation of the New York-based video-game maker.

A similar deal was struck with Ryan Brant, a former Take-Two CEO placed on five years' probation Aug. 1. Kenneth Selterman, a former general counsel at the company scheduled to be sentenced tomorrow, also made an agreement for probation.

Officials at technology companies including Comverse Technology Inc., Monster Worldwide Inc. and McAfee Inc. also have been charged in the probe of improper stock option backdating.

Kent Roberts, Santa Clara, California-based McAfee's former general counsel, is scheduled for trial Feb. 5 in San Francisco federal court on charges of fraud and filing false regulatory statements. The case is related to allegations that he changed dates on stock option grants and falsified board-minutes.

Ousted

Brocade, based in San Jose, California, ousted Reyes in January 2005 after the company restated earnings because of misdated stock options. The former CEO also faces a civil suit by the U.S. Securities and Exchange Commission.

Reyes was charged a year ago with securities fraud, conspiracy, making false SEC filings, false statements and falsifying books and records.

He was convicted of all charges today, found by jurors to have misled investors by backdating hundreds of employee stock grants in 2001 and 2002, including giving options with dates that preceded workers' hiring, and altering documents to hide the practice and inflate Brocade's financial results.

Federal prosecutors told the jury that Reyes intentionally misled shareholders from 2000 to 2004 by a ``systematic practice of cherry-picking low stock prices'' through the backdating of grants and failing to properly account for them, making Brocade appear more profitable than it was.

Denial

Reyes denied using hindsight to choose grant dates when questioned by lawyers investigating Brocade's practices, prosecutors said.

The government called witnesses who testified that Reyes understood that the granting of backdated stock options had accounting implications. During his seven-year tenure as CEO, he signed off on financial statements that failed to reflect expenses for those options, prosecution witnesses said.

During the trial, a former Brocade human resources employee testified that, in a conversation about stock options, Reyes said ``It's not illegal if you don't get caught.''

The staffer, June Weaver, said she couldn't remember any other details of the conversation.

Marmaro, Reyes's lead attorney, sought to portray his client as a well-regarded executive with no accounting background who offered stock grants as a way to attract talented workers to Brocade and enhance shareholder value. Reyes didn't receive backdated options and didn't testify during the trial.

Testified

Defense witnesses testified that stock option expenses didn't affect Brocade's cash reserves. They also said Reyes relied on Brocade's finance department to oversee accounting for stock option grants and accounting rules for stock options changed over time.

Brocade restated results in January 2005, widening its 2004 loss to $32 million from $2 million because of misreported stock- based compensation. The company restated the results again in November 2005, adding about $71 million in expenses it didn't properly record for options previously issued to executives on leaves of absence or in advisory roles.

When the verdict was read today in federal court, Reyes' wife sobbed, as did two female jurors afterwards.

``We've been through a lot,'' said one male juror who declined to be identified as he left the courtroom.

Brocade spokeswoman Leslie Davis declined comment. Brocade fell 36 cents to $6.19 in Nasdaq Stock Market composite trading.

The case is U.S. v Gregory Reyes, 06-0556, U.S. District Court, Northern District of California (San Francisco).

To contact the reporter on this story: Karen Gullo in San Francisco federal court at kgullo@bloomberg.net.

Last Updated: August 7, 2007 17:19 EDT