Appeals court orders new trial for Brocade stock options figure, cites government misconduct

Appeals court orders new trial in Brocade case

SAN FRANCISCO — A federal appeals court has tossed out the criminal conviction of the first Silicon Valley executive to go to trial in a stock options scandal that triggered investigations at hundreds of companies and charges against at least a dozen executives.

The 9th U.S. Circuit Court of Appeals ordered a new trial Tuesday for Gregory Reyes, former chief executive of Brocade Communications Systems Inc., citing prosecutorial misconduct. The court said a prosecutor lied when he told the jury that Brocade’s finance department was unaware that Reyes was doling out backdated stock options to company employees.

A judge last year sentenced Reyes to one year and nine month in prison and fined him $15 million after a jury convicted him on all 10 felony counts, including fraud, falsified accounting, conspiracy and filing false financial statements.

“In representing the United States, a federal prosecutor has a special duty not to impede the truth,” the appeals court wrote. “The record demonstrates that the prosecution argued to the jury material facts that the prosecution knew were false, or at the very least had strong reason to doubt.”

The court ordered a new trial, noting that the government’s original case appeared “relatively strong.”

The appeals court on Tuesday also upheld the conviction of Stephanie Jensen, the company’s former vice president of human resources. But the court ordered that she be given a new sentence for falsifying corporate records. Jensen was sentenced last year to serve four months in prison and pay $1.25 million.

Jensen and Reyes have remained free pending their appeals.

The Reyes’ case was the government’s highest-profile backdating prosecution. A spokesman with the U.S. Attorney’s office in San Francisco didn’t return a telephone call Tuesday. The prosecutor accused of misconduct, Timothy Crudo, has left the U.S. Attorney’s office for private practice. Crudo didn’t return a call seeking comment.

Reyes’ primary defense during the six-week trial in 2007 was that the finance department knew of his plan to retain talented employees by granting them options to buy the company’s stock at artificially deflated prices. Reyes’ position at trial was that he relied on the finance department to accurately record the stock options.

Reyes wasn’t accused of personally profiting from the backdating. But he was accused of defrauding investors by withholding information from Brocade’s finance department that caused them to file faulty financial statements.

Prosecutors said Reyes’ scheme made Brocade appear more profitable than it was, which indirectly helped him pump up the company’s stock price and command higher pay for himself.

San Jose, Calif.-based Brocade, which makes switches that connect companies’ servers to their data storage systems, wiped out hundreds of millions of dollars in previously reported profits from 1999 to 2004 after its books were corrected.

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