Ex-CEO of Brocade is found guilty

SAN FRANCISCO - Former Brocade Communications Systems Inc. chief executive officer Gregory Reyes was convicted yesterday of defrauding investors in the first case involving stock option backdating to go to trial.

The guilty verdict on all counts is an important validation of the Justice Department's options-backdating probe, which has led to criminal charges against at least 10 executives. Reyes was seen as an important test of whether a jury considered it a crime that deserved jail time.

His conviction could embolden prosecutors in their options investigations. The government has reportedly been looking at filing criminal charges against former executives at Apple Inc., KLA-Tencor Corp. and Broadcom Corp., companies that have acknowledged stock options shenanigans.

Reyes was charged with 10 felony counts of securities fraud, with prosecutors accusing him of doctoring company records and lying to investors and auditors about the company's options practices to falsely boost Brocade's profit. The trial, which lasted six weeks, went to the jury July 30.

Backdating refers to the practice of selecting favorable grant dates in the past when the company's stock price was low and retroactively pegging awards to those dates. The goal is to boost the recipient's potential windfall, and it is illegal only if it is not properly accounted for.

Prosecutors said Reyes intentionally kept compensation expenses associated with Brocade's options awards off the company's books. His defense team argued he did not understand the accounting implications and relied on Brocade's financial department to properly record the expense.

Reyes was charged last summer with 12 felony counts of securities fraud and other offenses. Brocade's former vice president of human resources, Stephanie Jensen, was also charged with 12 counts. Two mail-fraud charges were later dropped for both defendants.

The executives are being tried separately. A trial date for Jensen has not been set.