Brocade ex-CEO Sentenced in Backdating Mess

SAN FRANCISCO — Brocade Communications Systems’ former CEO was sentenced on Wednesday to 21 months in prison for backdating stock-option grants in a scandal that has ensnared scores of U.S. companies and led to billions of dollars of restatements.

Gregory Reyes, 45, was also fined $15 million. He stood calmly as Judge Charles Breyer of U.S. District Court in San Francisco imposed the sentence, but earlier he broke down in tears as he asked Breyer for leniency.

Reyes was allowed to remain free pending his appeal.

Prosecutors had sought a sentence of 30 to 33 months and fines and restitution totaling $131 million, including at least $47 million that the government says Brocade advanced to Reyes for his defense.

Reyes was chief executive of Brocade, a San Jose, California-based data storage network equipment maker, from 1998 to 2005.

He was found guilty in August of routinely dating options awards on days when Brocade’s stock was low, locking in potential gains if the shares rose. Such backdating is legal only if disclosed and accounted for in company books.

“This offense is about honesty,” Breyer said. “Every time Gregory Reyes falsified documents repeatedly over a three-year period, he was lying. That is the core of the defendant’s criminal conduct.”

More than 200 companies have disclosed internal audits or investigations by regulators and prosecutors in a scandal in which executives, many of them at Silicon Valley start-ups, routinely backdated options grants without disclosing and accounting for the practice as required by law.

Companies involved in the scandal have restated more than $13 billion of past financial reports, and dozens of executives have resigned. Reyes left Brocade in 2005 after company auditors raised questions about backdating practices.

Breyer found that Reyes had obstructed justice in preparing for his trial by making false statements under oath last year when his then co-defendant, former Brocade personnel director Stephanie Jensen, asked to be tried separately from Reyes.

“There can be no doubt that Mr. Reyes acted with the intent to mislead the court,” Breyer said. “The court must have truthful information before it in order to be just.”

The obstruction finding added six months to a sentence that otherwise would have totaled 15 months, according to the judge. Reyes in August was convicted of 10 counts of conspiracy, securities fraud and misleading regulators and auditors about Brocade’s finances.

Reyes must serve two years of supervised release after completing his prison term, Breyer ruled. Reyes’ lawyer, Richard Marmaro, had asked Breyer to sentence Reyes to home confinement or a halfway house and community service.

“I’m sorry,” Reyes told Breyer in court before the sentence was imposed. “There is much that I regret. If I could turn back the clock, I would.”

“I ask for your mercy and your compassion,” he added.

But Breyer said only a prison sentence could “adequately reflect the seriousness of the offense and the need for an adequate deterrent.” Breyer gave Reyes credit for “helping others and his “extraordinary acts of charity.”

“Mr. Reyes is a good and decent individual,” Breyer said. “He is the essence of what you want to see in an individual to whom much has been given. He gives much. He does so in an anonymous way.”

Brocade last year paid $7 million to settle a U.S. Securities and Exchange Commission lawsuit against it over the backdating.

At trial, Assistant U.S. Attorneys Timothy Crudo and Adam Reeves told jurors that Reyes knew backdating was illegal when not properly accounted for, but used the practice to attract and retain employees as competition for talent was intense in Silicon Valley.

Marmaro acknowledged at trial that Reyes had backdated option grants but was unaware of the legal or accounting implications of the practice and did not believe he was doing anything wrong.

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