Rethink Prosecutorial Misconduct Ruling, Feds Ask 9th Circuit

Government prosecutors have asked a federal appeals court in San Francisco to reconsider its decision that they intentionally misled a jury to get the high-profile stock option backdating conviction of ex-Brocade Communications CEO Gregory Reyes.

The government's petition for rehearing does not ask the 9th U.S. Circuit Court of Appeals to reverse the part of its August ruling that threw out the 21-month prison sentence and $15 million fine for Reyes. United States v. Reyes et al., No. 08-10047, 2009 WL 2501920 (9th Cir. Aug. 18, 2009).

It also does not it contest the part of that ruling that ordered a new trial for Reyes, who became the poster boy for the stock option backdating epidemic that swept corporate America because his conviction was the first the government won in such a case.

The Justice Department only asks the appellate court to rescind the part of its ruling that castigated prosecutors for telling jurors that Reyes defrauded his own company when prosecutors knew that the cost and impropriety of backdating were no secret at Brocade Communications Systems.

More than 200 companies, mostly computer and Internet technology firms like Brocade, faced shareholder suits and enforcement actions by regulatory agencies after a 2006 study found many companies manipulated stock award dates to give executives greater perks.

However, most of those cases died in their infancy after failing to clear procedural hurdles and meet high standards of proof.

Nevertheless, government prosecutors convinced a California federal jury in 2007 that Reyes had secretly rolled back the stock option award dates to historical low points, giving executives an extra undisclosed discount and a windfall profit at the shareholders' expense when the recipients cashed in the stock options.

If the extra compensation is not disclosed and accounted for, stock option backdating becomes illegal, and in some cases criminal.

A federal judge rejected a bid for a new trial by Reyes and Stephanie Jensen, one of his top officers, but the 9th Circuit said prosecutors' misconduct irrevocably tainted Reyes' conviction.

The panel only ordered a review of Jensen's sentence, but as to Reyes, it gave the government the choice of appealing the 9th Circuit's decision, completely retrying the case or dropping it entirely.

The Justice Department chose a fourth option: appealing only the prosecutorial-misconduct finding and asking the 9th Circuit to amend the ruling to "strike any suggestion that the prosecution acted deliberately in arguing false facts to the jury."

The government contends the determination constitutes appellate fact-finding that is unnecessary to support the decision and is belied by the record.

The petition contends that, although the Brocade finance department may have known that stock options were being awarded at certain levels, it did not get to see the pieces of the puzzle put together, so it did not know that the options were being illegally backdated.

"A finding of deliberate misconduct is particularly striking and unfounded where the District Court, who had lived with the case and its lawyers for months, found no misconduct at all," the petition says.

The government is represented by acting U.S. Attorney David Anderson, Chief Appellate Section Attorney Barbara Valliere and Assistant U.S. Attorney Amber Rosen.

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Reyes is represented by Seth P. Waxman of Wilmer Hale LLP in Washington, Jonathan H. Blavin of Munger Tolles & Olson in San Francisco, and Daniel Paul Collins and Fred A. Rowley of the firm's Los Angeles office.