Risk Management

If Byrd Sings, How Will the Brocade Case Swing?

Entering day two of stock-option-backdating trial against ex-CEO Reyes, defense says the case "begins with Mike Byrd," the company's ex-CFO.
Roy HarrisJune 19, 2007

The second day of the stock-options-backdating criminal trial of former Brocade Communications CEO Gregory L. Reyes began with clear signals that the case could turn on what ex-CFO Michael J. Byrd says.

On day one, defense attorney Richard Marmaro told the jury that the history of granting stock options at Brocade “begins with Mike Byrd.” The attorney noted that Byrd started at the network switch-maker in May 1999, but had a stock-option grant dated a month earlier, when he was offered the job, according to Bloomberg News. Marmaro further said that Byrd had “conceived and approved” Brocade’s practices.

“The finance department believed it was permissible without an accounting charge,” Marmaro added in his opening remarks. “Greg Reyes never sat down and told anyone to not account for stock options.”

Assistant U.S. attorney Tim Crudo told the jury that the case “is about deception, it’s about lies, and it’s about fraud,” according to press reports. “Every single backdated grant is going to have (Reyes’) signature.

While the prosecutor did not say what role, if any, Byrd will play in the case against Reyes, it has been reported that Byrd could be a key witness for the prosecution, and that the former Ernst & Young partner was granted immunity by prosecutors earlier this year. A call to Byrd’s attorney was not immediately returned.

As another witnesses, the defense plans to call Larry Sonsini, a partner with the Palo Alto, Calif., law firm of Wilson Sonsini Goodrich & Rosati, who served on the Brocade board from 1999 to 2005. Marmaro told the jury that Sonsini had helped complete Byrd’s stock-option documents, according to the Bloomberg report. Sonsini is also reported to be on the government witness list. A spokeswoman for Sonsini said that the attorney had no comment on the case.

The case against Gregory Reyes, charged with 10 felony counts of securities fraud, making false statements, and other offenses, is the first legal case involving the practice of backdating stock-options to reach trial. Legal experts are watching for signs of how future trials may play before juries. Since the early cases of backdating at companies like Brocade and Mercury Interactive were reported in 2005, investigations at more than 140 companies have been disclosed.

Also indicted last year was former Brocade human-resources executive Stephanie Jensen. The Securities and Exchange Commission last July charged Reyes, Jensen, and Michael Byrd’s successor as CFO, Antonio Canova, with civil fraud and other securities law violations. That case is continuing.