Former Brocade CEO Moves for Acquittal

On July 3, after the government rested its case, Gregory Reyes, former Brocade CEO, filed a Motion for Acquittal.  Yesterday, the trial judge declined to rule on the motion, apparently opting to allow the case to go to the jury before it is resolved. 

Although this motion attacks all of the charges against him, this summary will focus on Reyes’ arguments regarding Counts Two and Five-Seven. Count Two is Fraud in Connection with Brocade Stock, and Five-Seven are allegations of False SEC Filings. All of these charges fall under 10b-5. The indictment can be found here.

Reyes argues that the prosecution has not shown any of the elements of securities fraud. He starts by asserting that the prosecution has not presented any evidence that shows he was involved in the preparation of Brocade SEC filings. The defense goes on to argue that there has not been any evidence presented that proves Reyes understood any of the applicable accounting principals or realized that Brocade was violating them by its accounting for the stock option grants.

Perhaps the most compelling argument for the defense is that Reyes did not act with the requisite mental culpability; that is, he did not intend to cheat Brocade investors and he did not act willfully. To this end, the defense points out that Reyes did not personally benefit from any of the allegedly wrongful options grants. None of the grants were given by Reyes to himself, and grants to 16 officers were not backdated.

Another strong argument for the defense is its claim that the alleged misrepresentations were not material to investors. In its brief, the defense recounts portions of testimony from the government’s expert witnesses. On cross-examination, these witnesses conceded that when valuing a company, they typically do not consider non-cash options expenses.

In its reply brief, the prosecution argued it is only required to show one thing in order to establish the requisite level of scienter.  First, the government stated that "[i]f the evidence stablishes that the defendant acted knowingly that he was doing a wrong act, then the government has met its burden with regard to the required criminal intent."  The government argued that in addition it need only show that Reyes' "conduct caused a significant risk of a violation of the securities laws."  The government described its burden of proof regarding scienter as "modest", drawing support for this proposition in the fact that "a defendant may not be imprisoned- although he may be convicted- for violating the securities laws if he proves at sentencing that he had no knowledge of the rule or regulation."

While reviewing the evidence presented during its case in cheif, the prosecution argued that "[t]here is absolutely no reason to use the date of the low price except to avoid the compensation expense. None."

The defense fired back with a lengthy reply, which made extensive use of Judge Breyer's own words from a July 6 hearing relating to this motion.  The defense repeatedly quoted the Judge's statement; "we all know it's not illegal to backdate stock options."  The majority of the reply focused on the defense's argument that the government has not met its burden regarding Reyes' state of mind.  The defense rejected arguments by the government that it need only show that Reyes knowingly engaged in a wrongful act.  Instead, the defense asserted, the prosecution must show that Reyes acted with "a specific intent to cheat and deceive" and must also show he acted "willfully." 

According to the defense, much of the evidence presented by the government concerning Reyes' knowledge of accounting rules and their relationship to backdating options involved statements made by Reyes after the time period which the alleged misconduct took place.  This, the defense argues, is insufficient to show Reyes acted with scienter at the time of the allegations.  The defense was also careful to attack the prosecution's use of the Brocade 10-k's signed by Reyes as evidence of knowing and willful conduct.  Quoting the court's skepticism of this evidence, the defense argued that allowing these signed documents as evidence of scienter would essentially create strict liability for any innacurate SEC filings.

Lastly the defense asked Judge Breyer to grant the Motion for Acquittal before allowing the case to go to the jury.  The defense does not believe the jury's verdict will be based on "tangible evidence or even fair inference."  Instead, the defense fears, "it will be fueled by the anti-corporate officer sentiment expressed openly and repeatedly during jury selection, and it will be inflamed by the prosecutors' repeated reference to the wealth of the defendant and certain defense witnesses, and references to concepts such as the 'buck stops here' and the fiduciarty responsibilities of a CEO."

The judge plans to consider this motion while allowing the trial to go on.

For the indictment and briefs on this matter, see the DU Corporate Governance website.