The trial of former Brocade Communications Systems CEO Greg Reyes looks to be a close-run affair, given the decision of a US federal judge not to make a call on a defense motion to dismiss the case.
Reyes is the first US chief to face criminal charges in a campaign against stock option backdating that was launched jointly by the US Securities and Exchange Commission and Department of Justice last year.
If convicted, Reyes could suffer a jail sentence and heavy fines. Other Silicon Valley executives could then find themselves facing the same fate, as the SEC and DoJ move on with a campaign that they have promised will stamp out the poisonous practice of stock option back-dating.
According to reports, only last week SEC chairman Christopher Cox said that over the next few weeks his agency is likely to step up the pace of announcements in backdating cases.
But if Reyes is not convicted, the campaign may well come to a sharp halt.
The defense motion to dismiss the charges against Reyes was made earlier this month when the prosecution had completed the presentation of its case. Such motions are routine in US courts.
A legal source close to Computer Business Review who did not want to be named said that judge Charles R. Breyer’s decision not to reject or accept the motion is not hugely unusual, but does show that he is not yet convinced that the prosecution has presented a strong enough case to support a conviction.
The judge has said that he may wait until after the jury has delivered its verdict to make his call on the defense motion, according to a report from the Bloomberg news service. Computer Business Review’s legal source said that even if the jury returns a guilty verdict, because the judge has not rejected the defense motion, he could still quash the conviction on the grounds that no prima facie case was actually made.
Breyer has already indicated that he wants to see more evidence that Reyes actually understood the rules that bar stock option back-dating. Although ignorance of the law is no defense under US law, the prosecution still has to prove criminal intent by Reyes to deceive investors.
The defense case will wind up early next week. One defense high point was when a hedge fund manager who once owned nearly $500m of Brocade stock testified that he considered the cost of stock options irrelevant when evaluating the worth of companies.