U.S. v. Reyes: Defining Prosecutorial Misconduct

In United States v. Reyes, 2011 No. 10-10323 (9th Cir. Oct. 13, 2011), the Ninth Circuit Court of Appeals affirmed the defendant’s conviction for securities fraud, falsifying corporate books, and making false statements to auditors.

The defendant, Gregory Reyes, was the CEO of Brocade, a publically traded company that offered stock options to employees.  Mr. Reyes approved option grants to all employees, except for option grants for corporate officers.  In 2005, Brocade altered these policies and announced Mr. Reyes’ resignation.  These actions sparked an investigation by the SEC.  Ultimately the criminal authorities became involved and charged the defendant with having made false filings with the SEC under 15 U.S.C. §§ 78j(b) and 78ff, falsifying corporate records under 15 U.S.C. §§ 78m(b)(2)(A) and 78ff, and making false statements to auditors under 15 U.S.C. § 78ff.

After the first trial, the Ninth Circuit found prosecutorial misconduct and vacated the defendant’s conviction.  The court found the prosecution knowingly made false statements to the jury stating:

…the prosecution knew that several employees of Brocade’s Finance Department had given pre-trial statements to the Federal Bureau of Investigation acknowledging that the Finance Department knew about Reyes’s and the Company’s stock option backdating practices, but that during closing argument, the prosecution knowingly and falsely claimed that the Finance Department did not know about the stock option backdating.

After a second trial, the defendant claimed his conviction should be vacated because of additional prosecutorial misconduct and insufficient material evidence to support his conviction. 

Prosecutorial misconduct occurs when the government presents evidence to the jury that it knows is false or that it has strong reason to doubt.  This is designed to prevent the government from misleading the jury.  If the evidence introduced is not false and the prosecutor does not ask the jury to make false inferences from the evidence, there is no prosecutorial misconduct.

The defendant argued that the government introduced a false theory in the second trial when it asserted the defendant granted options for his own personal gain.  The court determined this theory was admissible because it was introduced to show the defendant’s motivation for granting the options. 

The defendant also claimed prosecutorial misconduct through the testimony of two witnesses, who the defendant claimed were only testifying to the backdating of options, which the government already knew was occurring.  The court determined that these witnesses were correctly allowed to testify because their testimony was not false, it was not used to mislead the jury, and it regarded their own experiences at the company.

The defendant argued his failure to disclose the option grants to investors was not material because it would not have altered their choice to invest.  Materiality is an element of securities fraud.  In order “for an omission to be material, there must be a substantial likelihood that the disclosure of the omitted fact would have been viewed by the reasonable investor as having significantly altered the ‘total mix’ of information made available.”  The court disagreed and found that the general investor would consider accurate accounting of a company material when deciding whether or not to invest.  The court therefore affirmed the defendant’s conviction.

The primary materials for this case may be found on the DU Corporate Governance website.