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TMCNet:  Ex-Brocade CEO Sentenced to 21 Months

[January 16, 2008]

Ex-Brocade CEO Sentenced to 21 Months

(AP Online Via Thomson Dialog NewsEdge) SAN FRANCISCO_For two years now, a lingering question surrounding the stock options scandal that triggered criminal charges against at least a dozen executives has been just how severely the courts would punish defendants who are convicted.

U.S. District Judge Charles Breyer provided an answer Wednesday, when he sentenced Gregory Reyes, the former chief executive of Brocade Communications Systems Inc., to 21 months in prison and fined him $15 million. Reyes was the first executive to go to trial.

It was the harshest penalty yet in a tempest that has rattled corporate America since 2006 _ and a sign that the courts consider the latest twist on securities fraud an offense deserving of substantial prison time.

The fraud involves ordering options grants to employees to be changed to look as though they were made on days when the stock's value was lower. Doing that boosts recipients' windfall when they sell the stock.

Backdating isn't illegal if it's properly disclosed. Concealing the practice can hide the true costs a company has incurred, inflating its profits and possibly its stock price.

Reyes' case has been closely watched for clues about how the courts might rule in other cases still working their way through the legal system.

Still ahead is the trial of Kent Roberts, the former general counsel of security software vendor McAfee Inc., set for April 15. Roberts faces seven fraud counts alleging he manipulated the values of his stock options to increase his potential windfall and then falsified McAfee's records to match.

While Reyes' $15 million fine won't dent the wallet of an executive who made hundreds of millions of dollars cashing out Brocade stock, the prison sentence sends a powerful signal to other executives awaiting trial on options-related charges.

"This offense is about honesty," Breyer said. "Every time Gregory Reyes falsified documents, repeatedly, over a three-year period, he was lying. That is the core of the defendant's criminal conduct."

Reyes was the first person to go on trial in the options scandal, which ensnared about 200 companies targeted by Justice Department and Securities and Exchange Commission investigations.

Many of those companies have had to restate their finances, erasing billions of dollars in previously reported profits, and dozens of corporate officers have been ousted.

San Jose-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.

Reyes, 45, 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 stock price and command higher pay for himself.

After a six-week jury trial, Reyes was convicted in August on all 10 felony counts, including fraud, falsified accounting, conspiracy and filing false financial statements.

Then in December, Brocade's former vice president of human resources, Stephanie Jensen, was convicted in a separate trial of conspiracy and falsifying corporate records for the same scheme. Her sentencing is set for March.

Reyes, Brocade's CEO from 1998 to 2005, broke down crying during remarks to the judge, who said Reyes helped increase his sentence by obstructing justice as he prepared for trial.

"I'm sorry," Reyes said between sips of water and long pauses to compose himself. "There is much that I regret, and if I could turn back the clock, I would. There were many things I would have done differently."

Breyer's penalty was below the recommendation in federal sentencing guidelines, but Breyer said he was impressed by Reyes' charity work and nearly 400 letters of support.

Reyes was released on his own recognizance Wednesday and will remain free until a federal appeals court weighs in on the case.

His punishment could influence the outcome of other options cases.

Other people charged with options-related crimes include executives from chip-maker Broadcom Corp., voicemail-software maker Comverse Technology Inc. and video game publisher Take-Two Interactive Software Inc.

Some of the cases have been resolved with guilty pleas and sentences of probation.

Comverse's former general counsel, William Sorin, is the only other executive sentenced to incarceration. He was ordered in May to serve a year and one day in prison after pleading guilty to several options-related crimes.

Copyright ? 2008 The Associated Press. All rights reserved. This material may not be published, broadcast, rewritten or redistributed.

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