Greg Reyes Exonerated On Options Backdating. Why That's A Good Thing.
I’ve covered Greg Reyes’ legal woes around options backdating from the very start—from the time word was just starting to zip around Silicon Valley that the Justice Department was looking for a “poster child” to prosecute for improper accounting of this form of compensation. I saw the once-swaggering Reyes go from being terrified (not to mention ostracized overnight in clubby tech circles) in those early months, to furious at what he felt was a politically-motivated crusade by the Bush Administration’s DOJ to appear tough on corporate crime (he’d point to the Bushies’ need to distance themselves from its close ties to former Enron chief Key Lay), to utterly despairing as it became clear he was going to lose the case. But through it all, I was struck by his insistence that he was innocent and would be exonerated.
Yesterday, that’s what happened. In a 21-page finding, a US Circuit Court of Appeals threw out the verdict that was to have sent him to jail for 21 months and cost him $15 million in fines. At this point, the Department of Justice—Obama’s DOJ, not the Bush DOJ that made backdating such a front-burner issue—hasn’t said whether it will retry the case or seek to have the appeal overturned. That seems highly unlikely, in part because the government’s case against Reyes, the former CEO of storage maker Brocade Communications, turned out to be so controversial.
The trial was marked by charges of bullying of key witnesses, one of which later recanted her testimony. And Judge Mary Schroeder of the US Court of Appeals for the Ninth Circuit cited prosecutorial misconduct in reversing Reyes’ conviction, which had been based on the argument that Reyes had hidden the illegal backdating from his own finance department. Turns out that prosecutors knew but failed to disclose to the jury that two former Brocade executives—controller Bob Bossi and CFO Tony Canova—had told the FBI that they were aware of the practice. And get this: soon after Reyes was convicted, Brocade brought civil suit against Reyes and others including Canova and his predecessor as CFO, Michael Byrd, with having colluded in the scheme. (From the start, even before he was indicted, Reyes told me he’d relied on Byrd and his team to make sure the options were properly accounted for and thus legal—and fumed at Brocade and Byrd, once a close friend, for not coming to his defense. And at the government, for not compelling Byrd to testify so as to make its case against Reyes stick).
As such, this would be a satisfying final chapter of the Reyes saga. For starters, on legal grounds. Schroeder notes in her opinion that prosecutors not only withheld information about Bossi’s and Canova’s admissions, but then brazenly criticized Reyes’ lawyers before the jury for even suggesting that they knew of the backdating. Schroeder writes:
“Defense counsel made no knowingly false statements. The prosecutor did. Indeed, on appeal the government does not seriously dispute the falsity of the prosecutor’s statements of the duty of the prosecutor to refrain from making such statements. Instead, it argues the misconduct was harmless.”
Not to Reyes, it wasn’t.
Then there’s the fairness issue. Until yesterday, Reyes was sure to go through life tarred with the “only CEO to go to jail for backdating” label. Whatever you think about the practice of backdating (more on that later), there’s no doubt that he bore far more than his share of the blame for a practice that was common in Silicon Valley in the 1990s. To a great degree, this was because Brocade happened to be one of the first companies to come to the attention of regulators. Reyes also ended up as backdating poster boy because his case turned into such a can of worms for the US Attorney. After much tough talk, the government settled most of its other backdating cases and didn’t bring cases at all in other cases where backdating clearly occurred—such as at Apple, where Steve Jobs admitted his role. By the time the criminal proceedings against Reyes had gotten rolling, it was becoming clear that backdating cases weren’t going to be the slam dunks the government had figured on.
Now, let’s hope this is where the great backdating scandal finally fizzles out for good. Yes, backdating is a sleazy practice, but it’s one that was adopted by hundreds of companies on the advice of lawyers and accountants in the years before Sarbanes Oxley and other rules changes clarified the do’s and don’ts. Simply put, it was a gray area. What’s more black and white, with the benefit of hindsight, is this: that the government would have been far better served putting its crime-fighting resources into investigating excesses on Wall Street, out-of-control mortgage lending and Madoff-style Ponzi schemes. It still would.