U.S. DOJ Wins Significant Victory in Securites Fraud Case

The Justice Department won its first stock options backdating trial on Tuesday, Aug 7, when the court convicted former Brocade Communications Systems Inc. chief executive Gregory Reyes of 10 counts of securities fraud.^[1] Reyes, faces up to 20 years in prison and a $5 million fine after a jury in San Francisco federal court found him guilty on all 10 felony counts of securities fraud against him.^[2]

U.S. District Judge Charles Breyer scheduled Reyes' sentencing for Nov. 21. Reyes federal criminal defense lawyer, Richard Marmaro, has asserted that Reyes will be seeking to appeal the conviction.^[3]

The verdict is one the government has coveted for sometime because it is an important validation of the Justice Department's options backdating probe, which has so far led to criminal charges against at least 10 executives.^[4] The case has been closely watched by technology companies, which maintained that the practice of backdating options was harmless and legal.^[5]

Backdating is the practice of retroactively pegging options grants or contracts to buy shares to favorable dates in the past when a company's stock price was low; it's illegal only if it's not properly disclosed and accounted for.^[6]

Securities Fraud
Securities fraud is covered by 15 U.S.C. § 77q, which states that it is unlawful for any person to offer or sell any securities by the use of any means of interstate communication or transportation, including the mails, in order to employ a scheme to defraud,^[7] to obtain money by omitting material information,^[8] or to engage in a course of business that would operate as a fraud on the purchaser.^[9]The punishment for violating this section is a fine of no more than $10,000, imprisonment for up to five years, or both.^[10] However, under the U.S. Sentencing Guidelines, a violation of section 77q is subject to an enhanced sentence.^[11]

Federal criminal defense attorney Douglas McNabb has previously discussed the crime of securities fraud in his blog, here.

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^[1] AP Staff, Former CEO convicted in stock options case, Associated Press Newswire, August 8, 2007, available at LEXIS, News Library, Wire News Services.
^[2] Id.
^[3] Id.
^[4] Id.
^[5] Id.
^[6] Id.
^[7] 15 U.S.C. § 77q(a)(1).
^[8] Id. § 77q(a)(2).
^[9] Id. § 77q(a)(3).
^[10] Id. § 77x.
^[11] 18 U.S.C. Appx. § 2B1.1.