In the Courts

Reyes filed that declaration in support of former HR chief Stephanie Jensen's motion to sever her trial from his. At Reyes' trial, though, his lawyers acknowledged that he did backdate stock options, but said it was done in full view of the company's finance department.

Last month, the judge called Reyes' statements in the declaration 'seriously misleading' and an obstruction of justice because they suggested Reyes would provide exculpatory evidence for Jensen when, in fact, he could not.

'The court must have truthful information in order for it to be just,' Breyer said evenly.

Reyes' attorney, Richard Marmaro, attempted to take the flak for the declaration, telling Breyer he had been the 'proponent' of it, along with Jensen's attorney, Keker & Van Nest partner Jan Little.

The language in the declaration was a product of 'poor drafting by the lawyers' and was not meant to apply to all of the disputed Brocade stock option grants, said Marmaro, a partner at Skadden, Arps, Slate, Meagher & Flom.

'To the extent this colors the court's view of the case, it's unfortunate,' Marmaro said in a soft voice, adding that he 'vigorously disagrees' with the court's conclusions.

Little peered impassively at the exchange from a corner of the courtroom. She declined to comment after the proceedings.

Reyes' Ninth Circuit appeal will be led by Wilmer Cutler Pickering Hale and Dorr partner Seth Waxman, Marmaro said after the hearing. Waxman is a polished U.S. Supreme Court advocate who served as solicitor general under President Bill Clinton.

A jury convicted Reyes last year on 10 counts related to stock option backdating, including securities fraud. His colleague, former HR chief Jensen, was convicted in a subsequent trial on two counts.

In sentencing papers and again in court, Marmaro had asked for a sentence of just over a year, with the first part to be served in a halfway house and the second at home. Marmaro argued that even a $17 million fine would be excessive, and restitution inappropriate.

The government had asked Breyer to impose a prison sentence of 30 to 33 months, a fine of more than $40 million and roughly $90 million in restitution to Brocade ' including Reyes' $46 million legal fees.

Prosecutors Timothy Crudo and Adam Reeves also asked that Reyes be remanded to custody, but white-collar practitioners say it is very common for a sentence to be stayed pending appeal ' especially on matters of first impression.

A pre-sentencing report from the probation office did not take a position on restitution, but recommended a $17 million fine and just over a year of incarceration. In imposing the $15 million penalty, Breyer noted Reyes' worth of $250 million. Restitution would not be appropriate, the judge said, because the legal fees would likely be the subject of future civil litigation.

When it came time for Reyes to address Breyer, the former executive immediately choked up.

'I stand before your honor a much different man than I was as CEO of Brocade,' Reyes said through tears. Breyer offered Reyes a five-minute break before continuing, which Reyes accepted. Upon resuming, Reyes said he was 'not sure it is even possible to make right what has happened, but he would try every day from this day to re-earn the trust' given to him.

'I promise you will not regret any leniency,' Reyes told Breyer.

In settling on a sentencing guideline range of 24-30 months, Breyer noted in his November ruling that Brocade had not suffered any loss. However, in rejecting some of Marmaro's arguments for a lighter sentence, Breyer said the fact that Reyes did not backdate his own stock options was beside the point. Reyes benefited from the higher stock price resulting from Brocade's artificially inflated earnings, the judge said.

Breyer also rejected Marmaro's argument that Reyes deserved leniency in part because a former Comverse general counsel who had pleaded guilty to backdating-related crimes got off with a much lighter sentence than the government requested for Reyes.

'In that case, the defendant pled guilty. In that case, the defendants cooperated with the government,' Breyer said.

But Breyer said he must weigh that against the outpouring of testimonials he has received about Reyes' character and good works. In his plea, Marmaro told Breyer about Reyes anonymously helping accident victims receive medical care, and other charitable works.

'It is only fair to give some recognition to the extraordinary acts of charity,' Breyer said. Addressing any counter-argument that Reyes could afford to be giving, Breyer said 'a lot of people have a lot of money, but not all of them are generous.'

After the hearing concluded, no one in the standing-room-only courtroom spoke as Reyes made his way through the crowded aisle, quietly hugging a few of the supporters he saw. Spectators waited until he exited before they followed him out.

On balance, Breyer's sentence seems carefully thought out, said Robert Weisberg, a professor at Stanford Law School who specializes in white-collar crime. The sentence isn't nearly as long as corporate defendants received in Enron or WorldCom, he said.

'It's not going to ruin his life,' Weisberg said. 'It's strong enough, however, to enhance the deterrent message.'

Prosecutors Crudo and Reeves echoed that thought in a prepared statement: 'The substantial prison sentence and fine should serve to deter similar corporate fraud in the future.'

For his part, Marmaro said Reyes would be fully vindicated on appeal.

'Despite two trials of the Brocade case,' Marmaro said, 'the government has been unable to produce one witness from all of Brocade's investors to testify that non-cash, stock option expenses were material to their investment decisions.'

This article was written by Dan Levine, a reporter for The Recorder, a sister publication of this newsletter.

False Affidavit Gets Reyes Six Months More

Inexact drafting by lawyers for former Brocade CEO Gregory Reyes may have gotten an extra six months tacked onto his stock option backdating sentence.

U.S. District Judge Charles Breyer sentenced the former Silicon Valley icon to 21 months in prison last month. Breyer also imposed a $15 million fine, but did not order Reyes to pay any restitution. Breyer stayed the entire sentence pending appeal. Breyer indicated, however, he would have imposed a shorter, 15-month sentence had Reyes not submitted a sworn affidavit to the court saying he did not backdate.

Reyes filed that declaration in support of former HR chief Stephanie Jensen's motion to sever her trial from his. At Reyes' trial, though, his lawyers acknowledged that he did backdate stock options, but said it was done in full view of the company's finance department.

Last month, the judge called Reyes' statements in the declaration 'seriously misleading' and an obstruction of justice because they suggested Reyes would provide exculpatory evidence for Jensen when, in fact, he could not.

'The court must have truthful information in order for it to be just,' Breyer said evenly.

Reyes' attorney, Richard Marmaro, attempted to take the flak for the declaration, telling Breyer he had been the 'proponent' of it, along with Jensen's attorney, Keker & Van Nest partner Jan Little.

The language in the declaration was a product of 'poor drafting by the lawyers' and was not meant to apply to all of the disputed Brocade stock option grants, said Marmaro, a partner at Skadden, Arps, Slate, Meagher & Flom.

'To the extent this colors the court's view of the case, it's unfortunate,' Marmaro said in a soft voice, adding that he 'vigorously disagrees' with the court's conclusions.

Little peered impassively at the exchange from a corner of the courtroom. She declined to comment after the proceedings.

Reyes' Ninth Circuit appeal will be led by Wilmer Cutler Pickering Hale and Dorr partner Seth Waxman, Marmaro said after the hearing. Waxman is a polished U.S. Supreme Court advocate who served as solicitor general under President Bill Clinton.

A jury convicted Reyes last year on 10 counts related to stock option backdating, including securities fraud. His colleague, former HR chief Jensen, was convicted in a subsequent trial on two counts.

In sentencing papers and again in court, Marmaro had asked for a sentence of just over a year, with the first part to be served in a halfway house and the second at home. Marmaro argued that even a $17 million fine would be excessive, and restitution inappropriate.

The government had asked Breyer to impose a prison sentence of 30 to 33 months, a fine of more than $40 million and roughly $90 million in restitution to Brocade ' including Reyes' $46 million legal fees.

Prosecutors Timothy Crudo and Adam Reeves also asked that Reyes be remanded to custody, but white-collar practitioners say it is very common for a sentence to be stayed pending appeal ' especially on matters of first impression.

A pre-sentencing report from the probation office did not take a position on restitution, but recommended a $17 million fine and just over a year of incarceration. In imposing the $15 million penalty, Breyer noted Reyes' worth of $250 million. Restitution would not be appropriate, the judge said, because the legal fees would likely be the subject of future civil litigation.

When it came time for Reyes to address Breyer, the former executive immediately choked up.

'I stand before your honor a much different man than I was as CEO of Brocade,' Reyes said through tears. Breyer offered Reyes a five-minute break before continuing, which Reyes accepted. Upon resuming, Reyes said he was 'not sure it is even possible to make right what has happened, but he would try every day from this day to re-earn the trust' given to him.

'I promise you will not regret any leniency,' Reyes told Breyer.

In settling on a sentencing guideline range of 24-30 months, Breyer noted in his November ruling that Brocade had not suffered any loss. However, in rejecting some of Marmaro's arguments for a lighter sentence, Breyer said the fact that Reyes did not backdate his own stock options was beside the point. Reyes benefited from the higher stock price resulting from Brocade's artificially inflated earnings, the judge said.

Breyer also rejected Marmaro's argument that Reyes deserved leniency in part because a former Comverse general counsel who had pleaded guilty to backdating-related crimes got off with a much lighter sentence than the government requested for Reyes.

'In that case, the defendant pled guilty. In that case, the defendants cooperated with the government,' Breyer said.

But Breyer said he must weigh that against the outpouring of testimonials he has received about Reyes' character and good works. In his plea, Marmaro told Breyer about Reyes anonymously helping accident victims receive medical care, and other charitable works.

'It is only fair to give some recognition to the extraordinary acts of charity,' Breyer said. Addressing any counter-argument that Reyes could afford to be giving, Breyer said 'a lot of people have a lot of money, but not all of them are generous.'

After the hearing concluded, no one in the standing-room-only courtroom spoke as Reyes made his way through the crowded aisle, quietly hugging a few of the supporters he saw. Spectators waited until he exited before they followed him out.

On balance, Breyer's sentence seems carefully thought out, said Robert Weisberg, a professor at Stanford Law School who specializes in white-collar crime. The sentence isn't nearly as long as corporate defendants received in Enron or WorldCom, he said.

'It's not going to ruin his life,' Weisberg said. 'It's strong enough, however, to enhance the deterrent message.'

Prosecutors Crudo and Reeves echoed that thought in a prepared statement: 'The substantial prison sentence and fine should serve to deter similar corporate fraud in the future.'

For his part, Marmaro said Reyes would be fully vindicated on appeal.

'Despite two trials of the Brocade case,' Marmaro said, 'the government has been unable to produce one witness from all of Brocade's investors to testify that non-cash, stock option expenses were material to their investment decisions.'

This article was written by Dan Levine, a reporter for The Recorder, a sister publication of this newsletter.