Former Brocade CEO Reyes Sentenced to 21 Months in Stock Options Case

Jan 16, 04:12 PM

Jan. 16--SAN FRANCISCO -- Gregory Reyes, the first chief executive to be convicted in a stock options backdating case trial, was sentenced today to 21 months in prison for his role in an illegal backdating scheme at San Jose-based Brocade Communications.

Reyes also must pay a $15 million fine.

The prison sentence, to be followed by two years of supervised release, was stayed pending appeal of the case.

The punishment handed down by U.S. District Court Judge Charles Breyer was clearly intended to warn executives about the consequences of breaking securities laws and lying to investors.

"What this case is really about is the failure of a CEO of a publicly traded company" to fully disclose important financial information, Breyer told the packed courtroom. "It is about lying to his company."

But having read almost 400 letters on Reyes' behalf citing the former CEO's generosity and his anonymous help to the less fortunate, the judge said he reduced the maximum sentence that he could have imposed.

"It's only fair to give some recognition for his extraordinary acts of generosity," said Breyer. "He is the essence of what you want to see of an individual to whom much has been given and who was given much."

In a tearful apology to the packed courtroom, Reyes said he vowed to learn from his experience.

"I am sorry ...There is much that I regret and if I could turn back the clock, I would have done things differently. I will try every day from

this day to re-earn the trust that was placed in me.

"I've tried to lead a good life. This experience has humbled me in more ways than I can express in words, but I am determined to learn from it."

Outside the courtroom after the hearing, Reyes -- dressed in a black suit, blue shirt and orange tie -- was hugged by supporters. He said he respected Breyer and the sentence, but said he intends to file an appeal.

Prosecutors had asked for 30 to 33 months prison time for Reyes, along with a hefty $41 million fine and nearly $90 million in restitution payments, mainly to Brocade, for its expenses and losses caused by the case. Brocade paid for Reyes' defense, which cost at least $46.7 million.

A jury of three men and nine women spent six days last August deliberating the case, before returning a guilty verdict on 10 criminal charges, including conspiracy and securities fraud. It was a stunning verdict and sent a chill through the Silicon Valley, where dozens of companies have had to restate earnings because they backdated stock options given to employees and failed to report it in filings with the Securities and Exchange Commission.

Reyes, 45, was the archetype of a Silicon Valley CEO, pouring long hours into promoting his company and pitching its products around the globe. He became its chief in 1998 at the age of 36 and took the company public in 1999. The company pioneered networked storage equipment and it grew rapidly during the late 1990s and its stock soared, reaching a split-adjusted high of $133 in October 2000. The stock nosedived with the bursting dot-com bubble and was trading at $6.46 today.

Like many Silicon Valley companies, Brocade used grants of stock options to reward employees in a competitive job market. Options are a right to buy stock at a set price and sell it at a later date. When the stock rises in value, the shares can be sold at a profit.

Reyes was accused of fabricating grant dates at which Brocade's stock was lower that it was on the true date of the grant, increasing their potential value. That did not break the law, but failing to report it as an expense to investors did.

Prosecutors said Reyes altered company records to keep investors from knowing the true cost of the millions of dollars in options he handed out from 2000 to 2004, and then lied about it to investigators when he was caught. His former vice president of human resources Stephanie Jensen was convicted in December on conspiracy and falsifying corporate records in a separate trial and awaits sentencing on March 12.

Reyes' appeal for leniency was bolstered by nearly 400 letters of support written to Judge Breyer, who said at a hearing last week that he had read them all. The letters portrayed Reyes as a generous giver to charity and a dedicated CEO who looked out for his employees' welfare.

In court filings, he pleaded for a light sentence because a long prison term would be hard on his children, one of whom has medical issues that were the subject of a sealed filing.

But Timothy Crudo, the federal prosecutor who won a ten-count conviction against Reyes last August in the first backdating case to go to trial, said Reyes spent more time on the road and working at his company than he did with his children.

Contact Pete Carey at pcarey@mercurynews.com or (408) 920-5419.

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