COMMENT 3 – ON BROCADE CEO GREG REYES – JAIL AND FINE METED OUT BY FEDERAL JUDGE – WHAT NEXT IN BACKDATING OPTIONS INVESTIGATIONS?

We’ve commented here (see prior posts #1 and #2) on the plight of the former CEO of Brocade Communications Systems, Gregory Reyes, and his journey through the federal justice system.  He’s now the first CEO convicted by a jury of his peers for manipulating stock options.  On January 16, 2008 he was sentenced to 21 months in prison and a $15 million fine.  Not a good sign for other senior corporate managers in the crosshairs of the feds on this issue (backdating).

 

The prosecutors in Northern California had been looking for Mr. Reyes to serve almost three years, make payments of more than $40 million in fines and $90 million in restitution to the company. But US District Court Judge Charles Breyer looked somewhat favorably on the CEO’s contributions to society, including his philanthropy.  The Los Angeles Times story reported that Judge Breyer said:  “The case is about the failure of a CEO of a publicly-traded company to honestly disclose financial information.  It is about lying to his company.”  Harsh words – and a clear warning to certain folk in the corporate sector.  (Most white collar crimes of this sort are pursued in the San Francisco- and New York City-based federal prosecutors.  One high-wattage former prosecutor in this category was presidential candidate Rudy Giuliani.)

 

From the CEO’s statement to the court:  “I’m sorry.  There is much that I regret. If I could turn back the clock, I would.  There are many things I would do differently.”  (LA Times.)

 

Our feature section on the spreading stain of the options backdating scandals – Hot Topics:  CEO Cash Time Machine – Backdating Options” – has some narrative related to time-travel (via backdating options) by CEOs and boards (including a column or two by me).  In the coming months, as the backdating investigations continue, we may hear more of these types of comments from those in high places convicted by the federal courts.

 

The temptation was just too great for what appears to be a significant number of executives who time-traveled to create personal wealth.  Read the great new book by Robert A. G. Monks – “Corpocracy – How CEOs and the Business Roundtable Hijacked the World’s Greatest Wealth Machine – and How to Get It Back.”  The book will help you understand the stock options temptations – and how a very useful management incentive (options) got out of whack.

 

(We’ll be doing a review of the book in this space.  It’s published by John Wiley & Sons, Inc., © 2007 by Mr. Monks.  ISBN 978-0-470-14509-8 in hardcover.)

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