The prosecution in the first criminal trial arising out the widespread corporate practice of stock options backdating concluded its case on Monday, July 2, 2007. The defendant, Brocade Communications’ former CEO Greg Reyes, has moved to dismiss the case. If Reyes’ motion is denied, the defense will put on its case which is expected to run through mid-August.
On the last day of its case, the prosecution presented a former SEC attorney who testified that Reyes admitted during the SEC’s investigation that “sometime during his tenure as CEO,” he became aware of the accounting implications of granting "in-the-money stock options." Although this testimony appears helpful to the prosecution, it is unclear whether it seriously weakens Reyes’ defense of good faith reliance on the professional advice of accountants and lawyers.
In addition to Monday’s testimony, the prosecution had earlier advanced its case by calling a former human resources employee to testify that Reyes once said that “it’s not illegal if you don’t get caught.” The witness testified that Reyes’ statement concerned stock options although she could not recall its exact context.
Assuming that the currently pending motion to dismiss is denied, it will be interesting to see what evidence the prosecution will present in the next six weeks. During the prosecution’s case, the defense made effective use of its cross-examination opportunities and was notably successful in convincing Judge Breyer to permit the questioning of a government witness about the widespread nature of backdating practices.