marv's Blog

The federal case against Gregory L. Reyes, former chief executive of Brocade Communications Systems Inc., a San Jose, Calif., data-storage networking firm, is likely to be watched by executives, lawyers and scores of other corporations caught up in the options scandal. It is expected to provide the first indication whether a jury considers backdating options a serious crime.

One issue in the case is the question of criminal intent. Specifically, whether Mr. Reyes knew Brocade had to expense stock options that were "in the money" at the time they were granted, as accounting rules specified.

Brocade didn't expense the options, and the company later acknowledged its mistake by restating its earnings to account for them.

Mr. Reyes, who faces the prospect of years in prison and millions of dollars in fines if convicted, is accused of defrauding shareholders between 2000 and 2004 by routinely altering the grant dates of stock options awarded to recruit and retain employees, and of falsifying documents to cover up the scheme.

Opening arguments in the case are scheduled for Monday.

Prosecutors are expected to maintain that Mr. Reyes understood the rules, and was involved in retroactively picking favorable option-grant dates and then altering board meeting minutes, and personnel and financial records to cover up the backdating from Brocade's auditors.

The government intends to introduce internal emails to bolster its case, including at least one they believe shows Mr. Reyes understood the implications of backdating, according to a person familiar with the matter.

Michael N. Levy, a defense lawyer at McKee Nelson LLP in Washington, who isn't involved in the case, said proving criminal intent in a corporate-fraud case can be difficult. "You don't usually have executives saying, 'I am going to knowingly violate the law and defraud people.' So you have to prove intent to defraud by using circumstantial evidence, and circumstantial evidence by definition is always subject to more than one interpretation."