First CEO Convicted of Backdating Says Company Owes Him $7M

The former CEO of Brocade Communications Systems says the data systems company illegally stopped paying his lawyer bills when he became the first top corporate officer to be convicted of backdating stock options.

Gregory Reyes is suing the company in the Delaware Chancery Court, saying it owes him more than $7 million in reimbursement for legal fees dating back to August 2007.

That month a federal court jury in California convicted him on all 10 of the federal government's criminal charges of doctoring the grant dates on stock options and hiding the cost from the software giant's shareholders.

Reyes, who stepped down in 2005, and Brocade's former vice president of human resources, Stephanie Jensen, were the first to be charged with violating federal securities laws for backdating stock options after news of the widespread practice surfaced in 2005.

The company eventually restated its finances to reflect the extra cost of the backdated stock options awarded between 2000 and 2004.

In backdating cases prosecutors and disgruntled stockholders typically charge that, when the grants are secretly pegged to a low point in the company's stock price history rather than the date on which they were awarded, the recipients get an undisclosed windfall at the shareholders' expense after they cash in the discount-priced options.

Reyes says that since Brocade is incorporated in Delaware it must abide by the state's statutes and case law, which require companies to pay the legal bills of their officers and directors as they come in for any legal action or investigation related to their service for the company.

The suit is one of the first seeking advancement of legal fees to be filed since the Chancery Court issued a landmark decision that requires Delaware-chartered companies to continue to pay those bills even after a trial court has found a defendant guilty of dishonesty or disloyalty. Sun-Times Media Group v. Black, No. 3518-VCS, 2008 WL 3009116 (Del. Ch. July 30, 2008).

In that ruling Vice Chancellor Leo Strine found that Hollinger International could not cut off legal fee reimbursement to former media mogul Conrad Black after he was convicted of pirating more than $30 million from his newspaper empire.

The judge ruled that, contrary to the position taken by Hollinger and many large businesses nationwide, Delaware companies are obligated to advance legal fee payments while officers appeal their convictions.

Reyes is currently appealing his conviction to the 9th U.S. Circuit Court of Appeals.

In this action he claims that his employment contract specifically provides for continued reimbursement even if he is convicted at the trial level.

Although Brocade initially paid all his legal bills on time, it later started to impose conditions that were not allowed by the advancement provisions of his contract, he says.

By December it had cut off all payments, just as Reyes was incurring skyrocketing legal costs for his appeal and other litigation, the suit says.

Reyes seeks an order requiring Brocade to immediately pay the $7 million fee backlog and to promptly pay any future legal bills without extra conditions and reviews not allowed by the employment contract.

He also asks the court to award him the cost of bringing this action, known as a "fees-on-fees" suit.

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Reyes is represented by Thomas Allingham II and Stephen Dargitz of Skadden, Arps, Slate, Meagher & Flom in Wilmington, Del., and Garrett Waltzer of the firm's Palo Alto, Calif., office.