By Edward Iwata, USA TODAY
The attorney for former Brocade Communications CEO Gregory Reyes, charged with fraud in the federal government’s nationwide crackdown against suspected stock-option accounting abuse, says prosecutors and regulators are pressing forward on a weak case for political reasons. In a written statement, Richard Marmaro of the Skadden Arps law firm accused the Justice Department and Securities and Exchange Commission of playing politics and filing charges based on “some perceived need to show quick action in response to the stock-option issues being discussed in the media.”
Marmaro added: “When the evidence comes out in court, Mr. Reyes will unquestionably be found innocent, and everyone will wonder why the government charged him in the first place.”
Patrick Murphy, the SEC’s enforcement chief in San Francisco, said: “Our case is based upon the facts. We think there’s clear evidence that backdating occurred, that the defendants knew it.”
U.S. Attorney’s Office spokesman Luke Macaulay said: “This case is moving forward based on the strength of the evidence.”
The issue of political motivation arises often in criminal cases, but, “It rarely gets any traction,” says Christopher Bebel, a former SEC attorney in Houston. Judges typically bar evidence of that kind, he says.
Federal officials on Thursday charged Reyes and former Brocade human resources vice president Stephanie Jensen with criminal and securities fraud. Former Brocade chief financial officer Antonio Canova was charged with securities fraud. Attorneys for Jensen and Canova have also denied the charges.
The complaints were among the first charges to be brought against executives suspected of stock-option accounting manipulation. Federal officials are investigating 80 U.S. companies, and Justice Department and SEC officials say they plan to file more charges.
In the Brocade case, Marmaro also said that “financial gain is always a motive in securities fraud cases, and here, there was none.” He said the government has not alleged that Reyes “made any money through the alleged option irregularities” or even “granted himself any of the options at issue.”
Scott Balber, an attorney at Chadbourne & Parke in New York who is uninvolved in the case, says that “one problem the government clearly has is that nobody benefited financially from the backdating.”
Reyes did legally sell hundreds of millions of dollars of Brocade stock over several years. But that won’t look good to jurors in an era of corporate scandals and high CEO pay, says Andrew Stoltmann, a Chicago attorney at Stoltmann Law Offices, which is uninvolved in the case.
It’s not illegal to backdate stock options. But companies must disclose it to the SEC, and cannot manipulate the dates of grants to increase their value.