In a federal court room overflowing with spectators, both the prosecution and the defense in the first criminal trial over stock options backdating presented their arguments Monday morning.
Greg Reyes, the former chief executive of San Jose-based Brocade Communications Systems, faces multiple charges for federal securities fraud. U.S. prosecutors allege that Reyes hid the cost of the company’s options backdating from securities regulators and investors.
Backdating refers to going back in time and picking a low price in the company’s stock and giving employees and executives grants based on the low price. That practice is not illegal, but prosecutors contend Reyes hid the impact of the employee compensation costs from investors.
“There would be no problem granting the money options, except the defendant hid the fact that he was doing so and made Brocade look more profitable than it really was,” said Assistant U.S. Attorney Tim Crudo in his 30-minute opening statement.
Richard Marmaro, Reyes’ attorney, said in his opening statement that Brocade’s stock options policies were adopted and known by a group of the company’s senior executives, and that the company’s first accountants, Arthur Andersen, never raised any questions about their procedures.
He said Brocade’s stock options policies were in place with the intention of hiring the best employees in Silicon Valley and that Reyes did not grant himself one backdated option. “No one believed that the company was committing securities fraud, no one believed the company was deceiving investors,” Marmaro said in his nearly two-hour opening. He said Reyes relied on advice from his senior executives, outside attorneys, the company’s board members and the company’s auditors.
Marmaro noted that Brocade’s former chief financial officer, Mike Byrd, was instrumental in setting up many of Brocade’s early policies, including sending offer letters to new hires and giving them options with the exercise price based on the date of the offer letter.
“It was always interpreted with the same intent, to attract and retain the best employees,” Marmaro said.
He described Reyes as an inspirational leader who led the company through its initial public offering, but also as a young executive who had never been CEO before and who relied on the advice of his more experienced executives in the murky area of accounting rules.
The prosecution called one witness, Colleen Burgess, who previously worked in Brocade’s human resource department. In her brief testimony, she described how she went back and picked low dates in the stock prices, as part of her job each quarter, for executives to review as they prepared stock options granting plans.
Burgess said at one point that Stephanie Jensen, Brocade’s former vice president of human resources who also faces charges and is being tried separately from Reyes, told her not to communicate about the stock options granting process via e-mail.
“I sent her an e-mail about an issue – and she came into my office, my cube (cubicle) and informed me not to document information like this over e-mail in the future,” Burgess recalled, adding that she remembered because it was about two minutes after she had sent the e-mail that Jensen talked to her about it.
Contact Therese Poletti at tpoletti@mercurynews.com or (415) 477-2510.
