By Roger Parloff
August 31, 2007

Though U.S. District Judge Charles Breyer once seemed torn as to whether the government had proven its criminal options backdating case against Brocade’s (BRCD) former CEO Gregory Reyes, he has obviously gotten past those qualms now.

His order denying Reyes’s motion for a new trial, issued late Wednesday afternoon, was his bluntest articulation yet of the presumptively crooked nature of setting option grant dates through the use of “look-backs,” i.e., retrospectively choosing the date when the stock was at its low for the quarter.

“A juror in this case is confronted with a simple question,” he wrote. “Why backdate? . . . The most plausible answer is to hide expenses.”

He continued: “The only explanation . . . proferred by Reyes in this case — because Brocade wanted to obtain attract and retain talent . . . — is no true explanation at all. This explains why Brocade might have wanted to grant options with low strike prices, that is, at less than fair market value. But a company can give away options without backdating them. The chief purpose served by the act of backdating itself is to make the grants look as though they were granted at fair market value, and thereby to avoid a compensation charge.”

(In late July, when Reyes moved for an acquittal at the close of the prosecution’s case — claiming the case was too weak to even allow it to be submitted to a jury — Judge Breyer asked the government for special briefing and then deliberated for days before ultimately denying it.)

Reyes’s new trial motion had focused not only on the alleged weakness of the evidence against him, but also on alleged prosecutorial misconduct. Reyes’s counsel Richard Marmaro, of Skadden Arps Slate Meagher & Flom, argued that the government played fast and loose with the facts when it argued to the jury that Brocade finance and accounting officials had been deceived by Reyes. Marmaro argued that, according to FBI reports not shown to the jury, many finance and accounting people were in fact aware that look-backs were being used, at least on certain occasions. (Ten days after the jury convicted Reyes, the SEC charged Brocade’s former CFO Michael Byrd with civil fraud relating to options backdating at the company; another former CFO, Anthony Canova, had already been civilly charged prior to Reyes’s trial.)

But Judge Breyer accepted the prosecutors’ argument that their position, the SEC’s, and the evidence were all consistent: by falsifying corporate minutes Reyes could have intended to deceive accounting and finance officials, even if, over time, some of those officials eventually came to realize, or should have come to realize, what was going on.

Rather than punish the prosecutors by ordering a new trial, as Marmaro had asked, Judge Breyer criticized Marmaro, accusing him of not just pointing out gaps in the prosecution’s evidence to the jury — which is perfectly proper — but of “gap-filling,” which is not. “Defense counsel repeatedly represented to the jury what absent witnesses would have said if they had been called,” he wrote. Breyer said the uncalled witnesses — which included all of the company’s highest finance and accounting officials — could have been called by either side.

Finally, Breyer endorsed the prosecution’s ridiculing of an abortive defense strategy before the jury as “trying to carry out a lie,” a comment which Marmaro had challenged as prejudicial, unprofessional, and below-the-belt. Marmaro had originally had a defense expert, David Gulley, do randomness studies of Brocade’s grant dates, apparently with an eye to exploring the viability of suggesting that perhaps no look-backs had ever been used. Gulley’s calculations had showed that randomness was quite unlikely, however, and Reyes ultimately conceded that the grant dates were set through the use of look-backs.

The prosecutor had argued in summation: “Why on earth would you pay Dr. Gulley a lot of money to prove something that you now agree with the government, that there were look-backs? And the reason you do that is if you were trying to carry out a lie, to see if there was evidence to support the lie, including to pay Dr. Gulley to support it. That’s a lawyer’s argument we didn’t hear.”

Judge Breyer ruled that the argument was a “hard blow,” but not a “foul one,” citing the words that the Supreme Court has used in distinguishing between what prosecutors may and may not do. “Here, evidence . . . indicated that the defense had explored the possibility of presenting expert testimony in order to suggest a fact to the jury that it conceded at trial to be untrue. It was not unjustified for the prosecution to call that effort to the jury’s attention, whether to call into question the credibility of the expert witness, or more broadly, the credibility of the arguments presented by the defense.”

How do readers react to Breyer’s rulings?

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