The 9th U.S. Circuit Court of Appeals has thrown out former Brocade CEO Gregory Reyes' criminal conviction for backdating stock options because of prosecutorial misconduct (pddf).
A three-judge panel of the 9th Circuit on Tuesday ordered a new trial because the prosecution misled jurors with false assertions during closing arguments.
The reversal destroys the government's first and most high-profile conviction of an executive for the backdating scandal that swept technology companies earlier this decade. Reyes was convicted of conspiracy and fraud in August 2007 for backdating employee stock options. He was sentenced to 21 months in prison and given a $15 million fine.
"Given that the government was very selective about picking poster-child cases for backdating, this is a problem, no question about it," said Robert Weisberg, a professor at Stanford Law School who teaches criminal law.
The court did affirm the conviction of former Brocade HR chief Stephanie Jensen, although it ordered her sentence reduced.
Prosecutors -- Assistant U.S. Attorney Adam Reeves and former AUSA Timothy Crudo, now at Latham & Watkins -- argued that employees in Brocade Communication Systems Inc.'s finance department didn't know about the backdating, bolstering the government's case that Reyes was masterminding the scheme. The prosecution even displayed a diagram to jurors to argue the finance department was in the dark, according to the opinion.
But finance department officers had told the FBI they knew what was going on, and the SEC was pursuing civil charges against Brocade's former CFO.
"Deliberate false statements by those privileged to represent the United States harm the trial process and the integrity of our prosecutorial system," wrote Judge Mary Schroeder, with Judges Stephen Reinhardt and Louis Pollack, a visiting judge from Pennsylvania, concurring. "We do not lightly tolerate a prosecutor asserting as a fact to the jury something known to be untrue or, at the very least, that the prosecution had very strong reason to doubt. There is no reason to tolerate such misconduct here."
Although the ruling refers only to "the prosecutor," Reeves and Crudo both handled closings. And it is Crudo who is quoted at length by the 9th Circuit panel, according to court transcripts posted on the Internet, saying at one point, "Our theory is that those people didn't know anything."
What the finance department knew played a central role at trial. Richard Marmaro, Reyes' trial lawyer from Skadden, Arps, Slate, Meagher & Flom, argued that the finance department execs were responsible for the options backdating, but never called them to testify.
"We're obviously elated by the court's decision, but we will have no comment at this time," Marmaro said Tuesday.
WilmerHale's Seth Waxman, a former solicitor general, was the lead lawyer on the appeal, and Morgan, Lewis & Bockius partners Franklin Brockway Gowdy and John Hemann helped coordinate the defense.
Reeves and Crudo didn't return calls seeking comment. U.S. Attorney's Office spokesman Jack Gillund wouldn't say whether the government will retry Reyes. "We're disappointed with the Ninth Circuit's decision and are analyzing the court's opinion," he said.
Although Gillund wouldn't comment on whether the Department of Justice's Office of Professional Responsibility was investigating, the OPR is required to look into any court's finding of prosecutorial misconduct.