Things were looking just grand for San Francisco federal prosecutors last summer, in the weeks after they filed charges against two former executives from Brocade Communications Systems Inc. They were the first to bring a criminal case in the metastasizing stock option backdating scandal, and while Brocade never looked like a simple case � the feds spent 18 months investigating before they filed charges � it was a big one.

In short, the times were good.

Then it got assigned to Charles Breyer.

Since his appointment to the bench in 1997, the U.S. district judge has historically been skeptical of newfangled securities fraud arguments. Indeed, he seemed particularly engaged in a 2001 case where he dismissed criminal insider trading charges against Keith Kim, an executive who learned of a pending merger � and capitalized on it with stock trades � through a leadership group he was in, rather than as a literal insider.

It didn’t take him long to throw a couple of kinks in the Brocade case, either.

First, Breyer decided in September not to stay a parallel civil suit filed by the Securities and Exchange Commission, which names former Brocade CEO Antonio Canova in addition to the criminal defendants, ex-CEO Gregory Reyes and former HR director Stephanie Jensen.

Breyer is one of a relatively small number of judges around the country who decline to issue such stays. So now the prosecutors have to pursue a criminal case against defendants who will get access to valuable discovery information.

And in a Friday hearing in the SEC case, Breyer seemed receptive to arguments by Richard Marmaro, the Skadden, Arps, Slate, Meagher & Flom lawyer defending Reyes, that the government’s case is exactly the type of novel allegation that deserves extra scrutiny. For that reason, Marmaro said, Breyer should hold a summary judgment hearing in the civil case ASAP.

Namely, Marmaro said he wants such a hearing to decide whether any manipulation of stock options had a material effect on Brocade’s earnings or expenses.

At a summary judgment hearing, the parties would argue whether, assuming backdating of options occurred, there was any harm to the company.

“If it’s shown this whole practice has no effect on the market, I think it has some relevance,” Breyer said in court.

SEC lawyer Susan LaMarca wasn’t so keen on Marmaro’s argument. “That this is outside the paradigm that Mr. Marmaro has seen before is immaterial to whether there was fraud,” she told Breyer.

But the judge’s reservations continued in a way that can’t be comfortable for the government. With more than 100 cases under investigation, Breyer wondered what it says “if something has gone on for years and all of a sudden it’s criminal.”

“I’m always concerned about the due process,” he added.

Justin Scheck


A giant concrete cross erected in San Diego to honor war veterans � the subject of a huge ongoing legal fight that’s already gone up to the U.S. Supreme Court � has recently lost some powerful supporters. One of them, Rep. Randy “Duke” Cunningham, pleaded guilty to graft charges last year and now resides in federal prison. Another, seven-term Rep. Richard Pombo, lost a re-election bid last month.

But the deposed Republican leaders returned from the political graveyard momentarily, both showing up as potential saviors for the Mount Soledad cross in a Fourth District Court of Appeal decision last week.

The city of San Diego moved to sell off the war memorial after the courts ruled in 1991 and again in 1997 that its control of the cross violates California’s prohibition against preference of religion.

The Fourth District, relying in part on Cunningham’s and Pombo’s statements and actions during their time as public officials, concluded that the city should be allowed to donate the property where the 29-foot cross stands to the federal government.

Cunningham’s contribution was fairly straightforward. He pushed through legislation that would allow the federal government to make the cross part of a national war memorial, which would be run by the San Diego-based veterans group that put up the cross in 1954.

But it may be Pombo’s words that reassured the Fourth District.

In a letter as chairman of the House Committee on Resources, Pombo said the Department of Interior would control the San Diego war memorial property, but the local veterans association would pay to preserve the cross.

What about the First Amendment’s separation of church and state, you ask?

Fourth District Justice Patricia Benke says the courts will cross that bridge when they get there.

“We assume government entities will act constitutionally,” Benke wrote in Paulson v. Abdelnour, 06 C.D.O.S. 11011.

Matthew Hirsch