A California jury has found former Brocade CEO Gregory Reyes guilty of securities fraud related to stock options backdating.
Reyes was charged last year with falsifying documents such as meeting minutes and financial reports to make it appear that stock options were granted at a time when Brocade's share price was low.
The former Brocade CEO was found guilty on all 10 charges brought by the US government, including securities fraud, conspiracy, and of falsifying financial records. He now faces up to 20 years in prison and $5 million in fines on some of the counts.
The conviction is the US Department of Justice's first relating to options grants backdating.
"He was involved in a scheme to backdate stocks and not to record the costs," said Tim Crudo, assistant attorney with the DOJ, after the verdict. Reyes' sentencing hearing is scheduled for 21 November.
Brocade has already restated its 1999 to 2004 results because of accounting issues related to these grants.
This practice of back-dating stock option grants has come under intense scrutiny over the past few years. Many Silicon Valley companies including Apple, McAfee, Sycamore and Rambus, have been under investigation for their stock option practices around the late 1990s, a time when technology companies competed fiercely for executives.
Backdating may have helped companies like Brocade attract employees, but it also cost investors millions of dollars, the government says.
Reyes' conviction has no binding to other backdating cases pending, said Scott Schools, attorney with the DOJ. All cases stand on their own merit, Schools said.
The conviction shows that backdating charges are provable and the department is confident it will be able to file charges against others involved in securities fraud, Schools said. "There are tons of paper to look through before deciding to file charges," Schools said.
The US Federal Bureau of Investigation supported the investigation until it the case was ready to go for indictment, Schools said. The DOJ also received assistance from the SEC in the investigation.
Reyes is disappointed at the verdict, but will continue to fight until exonerated, said his lawyer, Richard Marmaro in a statement.
"Greg did not enrich himself or gain personally from Brocade's stock option granting practices, and the government never even accused him of that," Marmaro said.