Read The Recorder‘s roundup of the stock-option backdating scandal. There won’t be a test later … but there might be a subpoena.



In addition to the criminal charges against Reyes and former Brocade HR director Stephanie Jensen, the SEC has a civil case against Reyes, Jensen and ex-Brocade CFO Antonio Canova.

That’s a relatively normal situation in a securities fraud prosecution. But in this case, U.S. District Judge Charles Breyer’s made the decision to allow the civil case and criminal case to proceed at the same time � as opposed to staying the civil proceedings until the criminal trial is over � putting a serious kink in both of the government’s cases.

With the criminal case pending, the SEC must now deal with witnesses taking the Fifth to avoid incrimination.

And it could be even worse for the criminal prosecutors, since the ongoing civil case has the potential to give defendants valuable discovery material that could be used for a criminal defense.

Marmaro lauded Breyer’s decision. “If the government indicts and charges people together, it should be willing to try them together,” he said.

ACCIDENTAL DISCOVERY

Perhaps the most contentious spat in the Brocade litigation began with exactly the type of thing the government was trying to avoid by asking for the civil case to be stayed: a massive discovery production by the SEC.

Buried within the millions of documents were internal SEC communications about the case. “The privileged document inadvertently produced to you is a string of e-mails exclusively among the commission’s staff,” SEC lawyer Susan LaMarca wrote in a Nov. 17 letter to Marmaro filed with the court.

She went on to write that, given the document’s content, “you could not help but know that it was mistakenly provided to you.” The SEC asked all three defendants to destroy the letter � and requested that Breyer issue an order requiring that to be done.

But Marmaro has fought that request, arguing that the government waived its work-product privilege by turning it over.

And it’s hard to blame him: according to lawyers familiar with the case � and speaking prior to Breyer’s Tuesday order that they stay mum on the issue of the document � the e-mails indicate that at one point, SEC accountants and lawyers felt that former CFO Byrd was responsible for alleged wrongdoing eventually pinned on Reyes.

Marmaro has said in open court that he believes Byrd is cooperating with the government, and served a subpoena on Maxim, the company where Byrd worked before coming to Brocade, to determine what its options practices were.

“According to Reyes’ new theory, Michael Byrd is the government’s ‘primary witness’ (though Reyes does not explain why he believes this to be true), during part of Mr. Reyes’ tenure at Brocade Michael Byrd was Brocade’s CFO and COO, Mr. Byrd had previously worked as a CFO at Maxim, and ‘it is believed’ that Byrd ‘brought’ Maxim’s stock option policies to Brocade,” wrote Patrick Doolittle, an associate at Quinn Emanuel Urquhart Oliver & Hedges representing Maxim. John Potter, a partner at the firm who represents Byrd and Maxim, declined to comment Wednesday.

Reyes’ co-defendants seem less interested in the accidental disclosures. Canova’s attorneys at Heller Ehrman did not object to the request, and Jensen’s attorneys said in court filings that they’d hold off on taking a stance until Breyer rules on whether it’s privileged

FISHING DEEP WATERS?

While the concurrent civil and criminal proceedings might give Reyes an advantage, aggressive discovery tactics can be used in the criminal case, too.

With subpoenas to two law firms and another tech company, Marmaro has attracted accusations of casting too wide a net for information that either exculpates his clients or impeaches potential witnesses.

Marmaro is making an “effort to undertake a fishing expedition” with a subpoena he served on Wilson Sonsini Goodrich & Rosati for documents produced in their internal investigation of the company, a lawyer with Howard Rice Nemerovski Canady Falk & Rabkin representing Wilson wrote in court filings.

Attorneys for Morrison & Foerster, which did a second internal probe of Brocade, used the same piscine terminology to describe a subpoena they got in the case.

And lawyers for Maxim, which had once employed Byrd, called Marmaro’s effort to gain information “a vindictive attempt to fish for impeachment material to sully Michael Byrd if Byrd is required to testify at Reyes’ trial.” They go on to say that he “fishes for broad categories of documents.”

Marmaro, obviously, disagrees. He says the third-party subpoenas are a normal part of preparing a criminal defense.

THE SONSINI CONNECTION

One issue that’s gotten plenty of attention in the Brocade case � the involvement of top Wilson Sonsini partner Larry Sonsini, a former director of the company � seems unlikely to go away, despite Marmaro’s protestations.

Sonsini’s name first came up in February, when Reyes told Business Week that the lawyer had recommended a corporate structure that allowed Reyes to have full control over option grants.

And in recent court filings, all three defendants have said they plan to defend themselves by saying they relied on the advice of Brocade’s outside lawyers at Wilson.

“I’m not sure it’s a central part of the case, but it’s certainly an important part of the case,” Marmaro said.

But he reiterated his oft-stated position that he won’t blame Sonsini for wrongdoing. “The lawyers gave good advice and were relied upon,” he said.

Furthermore, he added, the subpoena served on Wilson Sonsini in the criminal case was perfectly collegial.

“It does not set up an adversarial relationship between my client and Wilson Sonsini,” Marmaro said.

CHARLES IN CHARGE

The direction the case takes should become more clear over the next two weeks, as Judge Breyer has hearings scheduled in both the civil and criminal proceedings.

In a Tuesday order, he declined to expedite the hearing on what to do with the accidental disclosure.

“It is unclear to the court how the proverbial cat, having already been let out of the bag, could cause plaintiff any prejudice while the parties argue about what to do with it,” Breyer wrote.

But a case management hearing on Friday and hearings next week on the motions to quash the subpoenas will likely air out additional arguments.

Until then, though, lawyers in the case seem prepared to stay quiet. Jan Little, a Keker & Van Nest partner representing Jensen, didn’t return a call by press time, and Douglas Young, a Farella Braun & Martel partner representing Morrison & Foerster, declined to comment.

A spokesman for the San Francisco U.S. attorney’s office said lawyers there won’t comment on the pending litigation.

“We wouldn’t comment on an ongoing case,” added Marc Fagel, the head of enforcement in the SEC’s San Francisco office.

But Marmaro had something to say about other lawyers’ court arguments that his subpoenas and desire to move forward with the civil case are mere strategic maneuvers.

“They may view it as strategy,” he said. “I view it as a search for the truth.”