Brocade

Backdating Trial: Trouble for the Prosecution?

insider_trading graphic.jpgThe prosecution for stock options backdating related charges against former Brocade chief executive Gregory Reyes rested its case last Wednesday. But instead of spending the weekend preparing for the case the defense lawyers were scheduled to begin making on today, they wound up preparing an 18 page summary of their evidence that Reyes willfully ignored accounting standards and violated securities laws.
On Friday Judge Charles Breyer instructed the prosecution to deliver a written response to a defense motion to dismiss the case for lack of evidence. Although these motions are quite standard in criminal cases, the judge’s order for a written reply focused on the mens rea appears to indicate that he is at least taking seriously the defense contention that the prosecution has failed to present evidence that showing that Reyes understood the accounting rules that backdating violated.
The case is the first criminal case to go to trial following last year’s spate of revelations that many companies had backdated stock options. In many ways it is a test case of the government’s theory that backdating was a way to deceive shareholders in violation of securities laws. The defense in the case has argued that backdating was simply a tool for recruiting and retaining talented employees, and therefore may have actually benefitted the company and its shareholders.
Law professor Larry Ribstein, writing at Ideoblog, points out that whatever the judge decides here will shape future backdating cases. “Note that, if it is the case that Reyes can be prosecuted without proof that he knew the options were improperly reported, Steve Jobs better start suiting up (or whatever his equivalent is) for trial,” Ribstein writes. “On the other hand, if the Brocade case goes down, government criminal prosecution of backdating is in deep doodoo. We will then be left with civil cases focusing on bad disclosure — precisely where I have always thought we should be.”
The judge did not immediately rule on the defenses motion or the prosecutions reply. The defense case began today.
Judge Considers Dismissing Brocade Backdating Case [Wall Street Journal]
The Winds Shift in the Brocade Backdating Trial [LawBlog]
The Brocade trial gets interesting [Ideoblog]
Defense’s motion to dismiss [via WSJ]
Prosecution reply [via WSJ]

insider_trading graphic.jpgA key question in the great brouhaha over backdating—dating stock option grants on days when the stock was at a historic low rather than the date they were actually granted—has always been whether or not it matters to shareholders. Was backdating a trivial accounting matter that potentially increased compensation for those receiving the backdated options but had no serious effect on a company’s bottom line? Or did it represent something more serious that investors should have known about?
On Friday, a federal judge overseeing the trial of a former executive accused of fraud stemming from backdating declared that backdating was “material” to investors. But the way he arrived at this result has some legal scholars scratching their heads.
[We get scratchy after the jump]

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