The prosecution rested Monday in the criminal case against former Brocade Chief Executive Greg Reyes, and that whiz-bang piece of evidence drawing a clear, black line between Reyes and backdating just never materialized. As with the earlier testimony of prosecution witness June Weaver, with Monday’s witnesses, what seemed like damning evidence at first blush ended up drawing, at most, a grayish smudge between Reyes and backdated options. Still, the questions raised by the smudges were interesting.
Take the testimony of James Bidzos, co-founder and director at fellow Silicon Valley company Verisign. Bidzos served on Verisign’s compensation committee with Reyes and another director in 2004. Bidzos testified Monday about an e-mail exchange from October of that year, in which he asked Reyes for advice on a backdating question that had arisen at Verisign.
Bidzos, apparently the head of the comp committee, testified that then-Verisign human resources chief George Haddad had asked him to backdate a set of executive option grants. Bidzos told his fellow comp committee members he had major ethical problems with the request. He asked Reyes and the other committee member for advice: “Do you guys ask your comp committees to backdate option grants?”
Reyes’ response: “No. Under the current law it is not illegal. The only way around this issue is to delegate option granting authority to the CEO provided the grants are within board approval guidelines.”
This response is obviously interesting because one could conclude that Reyes advocated this delegation strategy because he happened to be a one-man options committee as CEO at Brocade. Bidzos testified Monday that he didn’t quite know what Reyes meant by his suggestion to delegate.
And later the same October 2004 day, Reyes sent Bidzos another e-mail saying: “OOOOOPS — TYPE (sic) — IT IS ILLEGAL TO BACKDATE OPTION GRANTS.” And in another e-mail three days later, Reyes told Bidzos: “This is a BIG issue and should be addressed.”
One could conclude that Reyes, realizing his e-mails could be subpoenaed one day, decided he’d better go on the record in the e-mail traffic as saying backdating was illegal. Or it could be that Reyes simply didn’t have a firm grasp at all of the legality of the practice. In any case, the line between Reyes and backdating turned out smudgy.
Also take the Monday testimony of Morrison & Foerster partner Craig Martin, who led the MoFo team that conducted an internal investigation for Brocade’s audit committee, once allegations of backdating came to light in 2004. On the stand, Martin discussed an internal Brocade memo that appeared to be a how-to-backdate manual.
The document, “New Hire Stock Processing,” directed whoever was putting together option grants to look up Brocade’s stock history on Yahoo Finance to find the lowest, and thus most advantageous, stock price in the quarter. Another step on the memo was to put a “sign here” sticky note on the grant once the best date had been selected. But it wasn’t clear whether Reyes had written the document, which Martin said was from the human resources department.
When Martin questioned Reyes in interviews in 2004 and 2005, Reyes admitted to receiving and signing grant documents, with “sign here” sticky notes, but denied that option prices were set the way the “New Hire” memo described. “He repeatedly denied ever pricing options using lookbacks at historical [stock] information,” Martin testified Monday.
And that was it. Martin was the last prosecution witness. Smudgy.
Coming up tomorrow, Reyes’s attorney, Richard Marmaro of Skadden, Arps, Slate, Meagher & Flom, is expected to file a Rule 29 motion by noon. The motion will argue that the prosecution case was so weak that U.S. District Court Judge Charles Breyer should acquit Reyes immediately. A hearing on the motion is scheduled for Friday. If Breyer doesn’t go for the motion, the jury’s back for the defense case on Monday, July 9.
— Jessie Seyfer
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