
I spent this morning in federal court in San Francisco, where Greg L. Reyes, the former CEO of Brocade Communications, and the first public company executive to be tried and convicted of fraud in the stock options accounting dragnet that began three years ago, was sentenced to 21 months in prison and made to pay a $15 million fine.
In August, a jury convicted Mr. Reyes of 10 counts of fraud for his role in a scheme to backdate the stock options grants he gave to his Brocade employees, a gambit to maximize the compensation tool’s value, and then doctor the company’s books to make it look like they were not actually “in-the-money” at the time of the grant.
This has been a complex and, arguably, a watershed case. The issue of whether backdating is illegal, of whether the accounting rules-violations and financial damage to shareholders that it spawned are worthy of criminal prosecution, has been hotly debated ever since Mr. Reyes was indicted in July 2006. We’ve written about what founders and other business people can learn from this case ourselves, here and here.
Intelligent minds will continue to disagree about this. But today made one thing very clear:
In rendering Mr. Reyes’ sentence, Judge Charles R. Breyer handed down a big and universal lesson on leadership — that the material element of the crime in Mr. Reyes’ case was not the mechanics of it, the backdating, but the morality of it — the lying.
Below we include partial transcripts from both Mr. Reyes’ statement to the court, and Judge Breyer’s powerfully-delivered speech, which followed. We urge you to read both.
Mr. Reyes spoke first.
Standing before a packed court room that was filled with his supporters — including friends, family, former Brocade employees, Mr. Reyes’ uncle, the out-going CFO of Google, George Reyes, and former tech investment banking star, Frank Quattrone (whose 2004 conviction for obstruction of justice was overturned in 2006) — Mr Reyes said:
“Hello Your Honor. Thank you for giving me the opportunity to speak today. This case began a little over three years ago, and it has been a difficult three years for me … and my family…”
Pausing to clear his throat, Mr. Reyes instead broke down in tears and was unable to go on for more than a minute, prompting a comforting gesture from the Judge (“Take your time, Mr. Reyes, I can see how upset you are.”), who ultimately called a five minute recess to allow Mr. Reyes to collect himself.
About 10 minutes later a renewed Mr. Reyes began again:
“…I stand before you, Your Honor, a much different man than when I stepped down from Brocade three years ago… There is much that I regret [and] if I could turn back the clock, I would. I don’t know if I can ever make right what has happened [but] I will do my best to regain the trust that was once placed in me. I’ve tried to live a good life, to be a positive
influence on my friends and family; I’ve tried to help people. This experience has humbled me in more ways that I am capable of expressing in words, but I am determined to learn from it and become a better person because of it…. I ask for your mercy and your
compassion and I promise [you that] you will not regret any leniency that you show me today. Thank you, Your Honor.”
Judge Breyer cut through most of the emotion to remind the standing room-only gallery what the case was really about:
“This case has been described as stock option backdating case, but as we know, the backdating of stock options is not the crime. It becomes part of the crime if the backdating is not disclosed… What this case is really about is the failure of a CEO to
honestly disclose the financial information concerning his company…“To the argument that the accounting and reporting was too complicated, Gregory Reyes never gave the auditors a chance because he lied to them. To the argument that the public would not care, the answer is simple. A jury in this court [rendered] it. The offense is about honesty. Every time Gregory Reyes falsified a document, repeatedly over three years, he was lying. That is the core of the criminal conduct.”
Explaining the seriousness of the crime, the judge–recalling Enron–explained it this way:
“This is not a victimless crime. It can effect the overall economy, employment, and as we saw with Enron, people’s life savings. This is why corporations are regulated. They must speak the truth about their financial obligations… this is true of startups of the dotcom [where] stock options were [used as] rewards … this was true with respect to Brocade.
Such a requirement is the very underpinning of confidence in the market.”
From the 1930s, leading up to the establishment of the Sarbabes-Oxley Act in 2002, Judge Breyer explained,
“…the goal of the Congress of the United States has been to ensuring the
integrity of the public market. [It is for this reason that] CEOs and CFOs are charged with the responsibility of telling the truth. …”This case must be a deterrent [to] the consequences of making false statements… Only a prison sentence accompanied by a substantial fine would adequately create affect a deterrent.”
However, in explaining the 21 month prison sentence he eventually rendered on Mr. Reyes, Judge Breyer took care to share with the gallery how impressed he had been from reading more than 400 letters of support for Mr. Reyes offered to the court by his personal and
professional relations. Such testimonials convinced him, Judge Breyer said, of the fact that
“Mr Reyes is a good and decent individual… who has lived a life dedicated to trying to benefit others [he has been philanthropic] and he has given unselfishly, anonymously, and with the very best of purposes… Now, I think it’s only fair to note people say, ‘well, he has a lot of money!’ He does have a lot of money, that’s true. But plenty of people have a lot of money, and not all of them are generous. He is generous in a way that sets the very — he is the very essence of what you want to see in someone to whom much has been given… that is one of the nobler purposes of charity.”
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