Reyes backdating conviction overturned; lying prosecutors called bad boys

Posted by Marc Hodak on August 19, 2009 under Scandal | 3 Comments to Read

Ex-Brocade CEO Greg Reyes was the example that prosecutors wanted to make out of a greedy CEO backdater, i.e., someone who schemed to inflate his compensation in stock options.  The prosecutors surveyed the field for the perfect poster child for their prosecutorial campaign, the perfect trophy for their case.  They passed over Steve Jobs, and settled on Greg Reyes.

The first problem they had to overcome was that Reyes, unlike Jobs, didn’t agree to the backdating of his own options–only those of certain people who worked for him.  Never mind that he didn’t personally benefit from the backdating; the prosecutors wanted their conviction.

The next problem was that Reyes claimed he didn’t know that the disclosure he signed off on was improper.  Backdating is, in fact, perfectly legal as long as it’s properly disclosed; then it’s just an in-the-money option, which is like an at-the-money option plus cash, both of which are commonplace (as were backdated options in Silicon Valley public companies of that time).  But never mind that he didn’t know his firm’s disclosure was improper; the prosecutors wanted their conviction.

The next problem was that the prosecutors knew Reyes didn’t know the illegality of his actions, and they held back that evidence from the jury.  That’s what bugged out the eyes of Ninth Circuit when they overturned the conviction.

The record demonstrates that the prosecution argued to the jury material facts that the prosecution knew were false, or at the very least had strong reason to doubt…

Deliberate false statements by those privileged to represent the United States harm the trial process and the integrity of our prosecutorial system. We do not lightly tolerate a prosecutor asserting as a fact to the jury something known to be untrue or, at the very least, that the prosecution had very strong reason to doubt.

I’m grappling with what the Court meant by “not lightly tolerate.”  If a CEO fails to disclose an otherwise legal award of options to his employees, we should not tolerate that by threatening his liberty and property to the tune of a 21-month jail sentence and $15 million fine.  If a prosecutor lies to a jury in order to deprive a man of 21 months of his freedom and $15 million of his cash, we should not tolerate that by…telling him it was a bad thing to do?  Help me out here.

Larry Ribstein offer his usual, insightful coverage