Home San Francisco Press Releases 2010 Former Brocade CEO Convicted of Securities Fraud
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Former Brocade CEO Convicted of Securities Fraud
Government Prevails in Options Backdating Prosecution

U.S. Attorney’s Office March 26, 2010
  • Northern District of California (415) 436-7200

SAN FRANCISCO—Gregory L. Reyes, former chief executive officer of Brocade Communications Systems, Inc. of San Jose, Calif., was convicted of four counts of securities fraud, four counts of lying to accountants, and one count of false books and records by a federal jury today, First Assistant United States Attorney David L. Anderson announced.

The jury, after deliberating three and one-half days, found that Reyes had backdated stock option grants to falsely inflate earnings in the financial statements Brocade filed with the Securities and Exchange Commission. Over the four-year scheme, Reyes received in excess of 13 million backdated options. Given declines in Brocade’s stock price, Reyes still made approximately $2 million from the fraud. The jury acquitted Reyes of one count of conspiracy. The guilty verdict followed a four week jury trial before U.S. District Court Judge Charles R. Breyer.

Evidence at trial showed that Reyes falsified the options grants by pretending a meeting to grant the options had taken place on a date earlier than it in fact occurred and backdated the stock option grants to hide that he was looking back and selecting lower, more favorable stock prices. By backdating the options grants, Reyes made it falsely appear that the grants were made at fair market value with no compensation expense when in fact the grants had a built-in profit for which Brocade should have recognized a compensation expense. As a result of this fraud, Reyes granted millions of options that were in-the-money and had better prices for inside employees than the outside investing public paid. At trial, the government’s expert, Gerald Fujimoto of Deloitte LLP, estimated the total amount of the fraud on the investing public at approximately $949,538,000.

Reyes, 47, of Saratoga, Calif., was indicted by a federal grand jury on Aug. 10, 2010. The sentencing of Reyes is scheduled for June 24, 2010 before Judge Breyer in San Francisco. The maximum statutory penalty for each count in violation of 15 U.S.C. §§ 78j(b), 78ff and 17 C.F.R. § 240.10b-5 (securities fraud); 15 U.S.C. § 78ff and 17 C.F.R. § 240.13b2-2 (false statement to accountants); and 15 U.S.C. §§ 78m(b)(2)(A), 78 m(b)(5) and 78ff (false books and records) is twenty (20) years in prison and a $5,000,000 fine. However, any sentence following conviction would be imposed by the court after consideration of the U.S. Sentencing Guidelines and the federal statute governing the imposition of a sentence, 18 U.S.C. § 3553.

First Assistant United States Attorney David L. Anderson and Assistant United States Attorney Adam A. Reeves prosecuted the case with the assistance of Paralegal Specialist Alycee Lane and Legal Assistant Jennifer Hiwa. The prosecution is the result of a five year investigation by the Federal Bureau of Investigation and the United States Securities and Exchange Commission.

Further Information:

Case #: 06-0556 (CRB)

A copy of this press release may be found on the U.S. Attorney’s Office’s website at www.usdoj.gov/usao/can.

Electronic court filings and further procedural and docket information are available at https://ecf.cand.uscourts.gov/cgi-bin/login.pl.

Judges’ calendars with schedules for upcoming court hearings can be viewed on the court’s website at www.cand.uscourts.gov.

All press inquiries to the U.S. Attorney’s Office should be directed to Jack Gillund at (415) 436-6599 or by e-mail at Jack.Gillund@usdoj.gov.

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