Reyes Denied New Trial

I just read an interesting thread from Roger Parloff from his Fortune blog. It's a nice summation, but makes me think that this judge is clueless. I'd like to think that while Reyes' motion for a new trial was denied, it has become even more apparent to me that he should be reversed on appeal. The arguments put forth by the judge for denial (according to the story/blog) are dumber than the original points. The point of backdating is NOT to cover up options expenses, it's to get people you deem important to be "in the money". The expense issue – at least in the Brocade case – is totally irrelevant as it had zero material impact to investors, the IRS, or anyone else concerned. I'd be willing to bet the judge has had more "gain" by hiding or adding questionable expenses and write-offs on his taxes than Brocade could have possibly realized in this action. I sort of wish I was called as an expert witness. Now that I understand the game, this should have never gotten to this point. Both lawyers must have confused the hell out of the jury, and it sounds like His Honor did nothing to clarify or correct the confusion and misinformation.

Comments

[MDLH]

Wow, Steve. That writeup in the Fortune blog is incredible to me.

This case is beginning to really shake my faith in the US justice system.

According to the fortune blog you cite, the Judge wrote,
“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.

Did the judge really write this?

He seems to be confusing the issue on trial here which as far as I know is not whether backdating occurred, and whether Reyes knew it. Backdating did occur and Reyes knew it.

The issue, that needed to be PROVEN and was NOT- is whether Reyes knew that there needed to be an accounting charge for these options! And to prove that Reyes knew there needed to be an accounting charge, they would have needed some sort of email or proof- not that there was backdating and that Reyes knew it, but that Brocade's books were wrong. For this issue the fact remains that other companies, larger than Brocade were backdating and not expensing. So there is an implicit validation in Brocade not expensing, Reyes and Brocade could have easily thought THEIR interpretation of the rules were wrong if they thought and expense was involved, due to widespread corporate behavior. And this would have been the perview of the CFO, to tell Reyes that an accounting charge was involved.

Reading the Judge second guessing why in the money options were used leaves me with a rock in my gut. How the heck would some federal judge know why these things were used, unless the federal judge was in the business of creating silicon valley companies! They were used because people wanted them more than cash bonuses, then, because options had unlimited upside, and people love to believe. And management likes them because there is a 4 year vesting period before that employee gets the benefit. This is why they are used.

Wow. Again wow. What a disappointment.

[Dan]

Spending all of this energy defending a convicted fraud really does wonders to cement your reputation as the asshole of the industry, Steve.

----Thanks for the kind words. "The" asshole? Wow. Regardless of your well founded opinion of moi, you should learn to read. I'm on record saying I think he backdated, my issue is whether or not the government made Reyes the poster child of the backdating issue at all costs. Bernie Ebbers, Ken Lay, etc. all made piles of money and defrauded billions from individual investors. Reyes didn't. No one at Brocade did. I'm also not defending Reyes so much as questioning the U.S. Government and the integrity of this case. It just smells bad. The fact that it's Brocade, and that a lot of us lived through their meteoric rise makes it interesting to me. The fact that there are 80 or so other IT companies in line for the same potential treatment makes it potentially enormous for all in this industry. I'd even defend your fundemental rights to a fair trial where the burden of proof is on the government. I may be an asshole, but at least I'm fair about it. Were you wearing your "Nifong for President" shirt when you wrote this? ---- Steve

[MDLH]

I think the DOJ wanted to press all these backdating cases against companies like Broadcom but they had a problem. The first case to go to trial was Reyes, which was a very weak case for the prosecution. Prior to the Reyes trial, most experts thought the prosecution had all this evidence of Reyes intent to defraud with a lot of star witnesses. As the trial wore on it was obvious they had nothing.

The DOJ knew there were going to have a tough time winning this- so, they cheated.

- the DOJ acted like they were cutting a deal with CFO Byrd which kept the Reyes team from calling Byrd as a witness.
- the DOJ called inflammatory witnesses saying things like Reyes said "its not guilty if you don't get caught"- with no context whatsoever. The judge should have disallowed this hysteria but did not.
- the DOJ acted throughout the trial that Reyes intentionally hid all options backdating from everybody in finance when they knew otherwise based on their indictment of Byrd after the trial.
- the DOJ went so far as to lie in their closing arguments that the CFO Byrd was deceived.

[Jerry]

I hope 'Dan' has worked in Silicon Valley for a little while because he may actually understand one of the reasons why stock option-related punishments that go to the extreme may not be great for the valley. And, I am not really convinced Mr. Duplessie fully understands. Because its a blog response, I wont get into the gory accounting details, but if you recall, Stock Options Expensing was a big deal to the Valley. I can recall the FASB (the people making the accounting rules) getting hammered over the thought of treating stock options as an expense. The Valley actually won half the argument as Stock Option Expenses has to be reported but companies can choose to report it separately. I have had candid conversations with CFOs who wish this wasnt the case mostly because there isnt a definitive way to account for them. However, reporting all expenses is the right thing to do, and the FASB and the Valley found a happy medium. Brocade broke the law, but making Mr. Reyes pay for it with jail time would be the equivalent of the FASB saying expense all stock options and you can only report GAAP results (not line-iteming the Stock Option expense). The happy medium for stock options backdating would have been fines paid by the companies, the executives, and the boards who let it happen. Jail time is a bit of an extreme. The impact to the Valley of all this jail time is more conservative CEOs who may not want to take chances with stock options or certainly will be very conservative with how they are used, because one accidental mistake could cost them jail time. Think about the Valley without stock pptions. Oops the FASB already did and found a happy medium. Maybe the government should learn from the accounting industry.