Read The Recorder‘s roundup of the stock-option backdating scandal. There won’t be a test later … but there might be a subpoena.
Defense lawyers say the SEC’s view of that practice will have a major impact on the backdating investigations.
Another defense lawyer who asked not to be identified due to client sensitivities said that could be the single most important product of SEC/Big Four discussions.
“The very conservative accounting view of a unanimous written consent is that a grant isn’t valid until the very last signature,” the lawyer said. “It’s unpractical to handle it that way.”
A more charitable view of business as usual in the Valley would hearten defense lawyers. “If the meeting between the SEC and the Big Four firms results in the Big Four accounting firms being more practical about their judgment, that could be very helpful,” the lawyer said.
But that concern means little to Richard Marmaro, the Skadden, Arps, Slate, Meagher & Flom partner representing Reyes. He said Thursday his client is facing an unfair lot.
According to government prosecutors, in an effort to compete in the high-intensity Silicon Valley job market, Brocade egregiously backdated options as a way of trying to attract employees.
The criminal complaint says Reyes and Jensen “intentionally devised, and intended to devise, a scheme and artifice to defraud Brocade, its Board, its shareholders, its auditors, the public, and the SEC as to a material matter.”
But Marmaro disagrees � he says the government has no proof of his client’s intent and doesn’t even allege that Reyes made money off the alleged backdating.
“They’ve got the wrong guy. There’s no evidence of self-enrichment,” Marmaro said. “He never granted himself options.”
He said that “there were some paper problems in the company’s HR department” that resulted in backdating but that it didn’t amount to criminal conduct.
“We’re planning to move to dismiss the complaint,” he said. “There’s no evidence in this case.”
But Linda Thomsen, the chief of enforcement at the SEC, told reporters Thursday that it doesn’t matter that Reyes didn’t cash in himself: Executives still face liability because the backdating concealed corporate expenses, and that may have affected stock prices.
At the press conference, one reporter raised a figure of considerable recent interest in Brocade: Larry Sonsini, the chief rainmaker at Wilson Sonsini Goodrich & Rosati, a firm that has represented at least half the 32 Silicon Valley companies under investigation at one time.
In an interview with Business Week magazine earlier this year, Reyes blamed Sonsini � who was a member of Brocade’s board � for suggesting an options-grant program that let the CEO act as a “committee of one” to grant options. Ryan wouldn’t comment on Sonsini or other board members.
But Marmaro was adamant that his client’s statements aren’t an attempt to blame the attorney for wrongdoing. Instead, he said Sonsini recommended a perfectly appropriate system.
“Larry Sonsini and the board of directors gave Greg Reyes full authority to price options as he saw fit,” Marmaro said. “And Larry Sonsini is an honest, ethical man.”
