Brocade CEO gets 21 months, $15 million fine for options scheme

SAN FRANCISCO — The former chief executive of Brocade Communications Systems Inc. was sentenced today to 21 months in prison for orchestrating a scheme to tamper with the company's records of stock option grants.

Gregory Reyes, Brocade's CEO from 1998 to 2005, was also ordered to pay a $15 million fine.

U.S. District Judge Charles Breyer said Reyes obstructed justice in preparing for trial, which led to a stiffer sentence.

"This offense is about honesty," Breyer said. "Every time Gregory Reyes falsified documents, repeatedly, over a three-year period, he was lying. That is the core of the defendant's criminal conduct."

Reyes was the first executive to be tried over stock options backdating when his case went before a federal jury in San Francisco in June 2007. He was convicted in August of 10 counts of securities fraud.

At least a dozen other executives have been criminally charged for options dealings in a sprawling probe that rattled corporate America and revealed widespread mishandling of a common tool used to recruit and retain workers.

About 200 companies have been targeted by Justice Department and Securities and Exchange Commission investigations, and many have had to restate their finances, erasing billions of dollars in previously reported profits and leading to the ouster of dozens of corporate officers.

The San Jose-based company, which makes switches that connect companies' servers to their data storage systems, wiped out hundreds of millions of dollars in previously reported profits from 1999 to 2004 after the inaccuracies came to light.

Reyes' case has been seen as an important test of how seriously infractions of options-related securities laws will be punished.

Reyes broke down crying while speaking to the judge before his sentence was handed down.

"I'm sorry," Reyes said, in between sips of water and long pauses to compose himself. "There is much that I regret, and if I could turn back the clock, I would. There were many things I would have done differently."

Breyer said the 21-month sentence and substantial fine were appropriate because of the potential backdating schemes had to harm the public's trust in the accounting of publicly traded companies.

Still, the penalty was below what the sentencing guidelines recommend. Breyer said he was impressed by Reyes' extensive charitable work and nearly 400 letters of support for Reyes sent to the court.

"He is the essence of what you want to see from an individual to whom much is given — he gives," Breyer said, noting that Reyes received hundreds of millions of dollars from the sale of Brocade stock.

Reyes was released on his own recognizance and will remain free until a federal appeals court weighs in on the case. His lawyer, Richard Marmaro, declined to comment after the hearing.

Reyes was convicted in August on 10 counts, with a jury finding he retroactively assigned prices to options awards given Brocade employees and illegally doctored records to hide the true costs of those grants from auditors and investors.

Prosecutors contended the practice made Brocade appear more profitable than it actually was, which in turn may have inflated its stock price. Backdating is illegal only if it's not properly accounted for.

Prosecutors had recommended a sentence for Reyes of 30 to 33 months plus a fine of more than $41 million and restitution of nearly $90 million to repay Brocade for its losses and legal fees connected to the case.

Reyes' defense team requested a sentence of no more than 13 months to a halfway house or home detention.