Yesterday, Gregory L. Reyes, Jr., the former Chief Executive Officer of Brocade Communications Systems, was sentenced to 21 months in prison and ordered to pay a $15 million fine for his role in stock options backdating at the technology company.

Reyes was the first public company executive to be tried in the stock options probe the Department of Justice launched in 2006. In August 2007, Reyes was found guilty of ten counts of conspiracy and fraud for his role in orchestrating a scheme to change the grant dates for hundreds of stock option awards without disclosing the changes to investors. Backdating options is not itself illegal, so long as it is properly disclosed and recorded as expenses. If the practice is not properly disclosed and recorded, however, it is illegal because it hides costs from shareholders and regulators.

While Reyes' sentence was below the recommendation of the United States Sentencing Guidelines, which are now advisory, it was still the harshest penalty yet in the securities fraud dragnet that has ensnared approximately 200 companies, led nearly 100 companies to restate their financial results and forced dozens of top executives to resign.

Not surprisingly, this case has been widely viewed as an indication of how seriously the DOJ and SEC will pursue options backdating cases and how severely those convicted will be punished. Yesterday’s sentencing will no doubt further bolster efforts to prosecute these securities fraud cases and seek significant jail time and fines for those convicted.

Given this climate, it is important for companies and their boards to evaluate their stock option granting practices and proactively consider reviewing these practices and/or self-reporting. Ballard Spahr Andrews & Ingersoll, LLP's Securities Group and Corporate Compliance and Investigations Group have already assisted companies and boards in this process. In addition, Ballard Spahr's White Collar Litigation Group has extensive experience in handling civil and criminal government investigations, and its Insurance Group has the depth of experience that companies may need in evaluating coverage under directors and officers insurance policies. For more information regarding this topic, please contact:

Justin P. Klein at 215.864.8606 (kleinj@ballardspahr.com)

John C. Grugan at 215.864.8226 (gruganj@ballardspahr.com).


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