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Lawyers for ex-Brocade CEO Gregory Reyes got kneecapped Tuesday. In the first trial for backdating stock options, the defense has been that Reyes had no idea the practice was wrong. So it couldn’t have been pleasant for defense lawyers when prosecutors told them on short notice that they had a witness who’d testify that Reyes told her, “It’s not illegal if you don’t get caught.” Judge Charles Breyer will decide today whether the jury will hear that testimony, after Reyes attorney Richard Marmaro said � out of the earshot of the jury � that prosecutors improperly waited until Tuesday morning to disclose the statement of ex-Brocade employee June Weaver. If Breyer allows the testimony, it could discredit defense arguments that as an executive without legal or accounting training, Reyes didn’t know how to properly expense or price options � and was unaware that backdating them could be a crime. The revelation of Weaver’s statements to prosecutors seemed as astonishing to Breyer as it was to Reyes’ defense team. “In my view, it’s a very inculpatory statement,” Breyer said, as prosecutors explained why they hadn’t notified the defense of the statement earlier. Weaver took the stand Tuesday afternoon, but Assistant U.S. Attorney Adam Reeves refrained from asking her about the statement pending today’s hearing.

Morning Update: Breyer makes the call, and Richard Marmaro is not looking happy. Legal Pad has the latest.

Breyer then had lawyers from both sides explain their take on the statement � and why it wasn’t revealed to the defense weeks ago. “It’s a little late,” Breyer said. Reeves said the law only requires information from FBI interview forms to be turned over well in advance � and in her FBI interview, Weaver didn’t mention the interaction. “I learned of this statement on or about April 30,” Reeves said, when he was preparing witnesses. Breyer said he was concerned that the late disclosure amounted to a rules violation, though he was hesitant to acquiesce to Marmaro’s demand for an evidentiary hearing. In the end, he ordered each side to submit briefs this morning on whether the testimony is admissible. NEVER A DULL MOMENT The case has been making a stir for more than a year. Even before Reyes was indicted last July, he had blamed top Valley attorney Larry Sonsini for some of his options woes. And a cross-examination on Tuesday – only a day after opening statements- highlighted the entanglements between tech companies and their attorneys in the options debacle. Stephen Beyer, a former HR administrator with Brocade, was called as a government witness Tuesday to testify that Brocade routinely backdated employee stock options. Like the previous witness � another former HR worker � Beyer talked about how former HR director Stephanie Jensen, herself awaiting trial for securities fraud, directed employees to manipulate grant dates, and indicated that they shouldn’t discuss that process in writing. Beyer said the process made him uncomfortable, adding that he was concerned that there was a “legal issue” in repeatedly repricing options grants to benefit new employees. So when it came time to cross-examine Beyer, Jack DiCanio � a Skadden, Arps, Slate, Meagher & Flom partner representing Reyes � asked the witness if he had dealt with misdated options at his prior job at KLA-Tencor Corp. “KLA, to my recollection, priced its options the same week every month,” Beyer said. That raised eyebrows, since KLA has been one of the most highly publicized companies with options-dating issues � something the Skadden lawyers know well, since Reyes’ chief defense counsel, Richard Marmaro, performed KLA’s internal investigation. In response to Beyer, DiCanio produced two internal KLA e-mails in which the witness appeared to play a direct role in backdating options grants.
Optional Reading

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

“Steve,” wrote a KLA employee in an e-mail dated Sept. 12, 2000, “you need to take this forward for signature. It has to have the 8/13 date.” The e-mail also told Beyer to get the form signed by only two of the company’s three options committee members, Gary Dickerson and Kenneth Schroeder. “Do not let it go to Ken Levy,” the message continued. Beyer then admitted that the e-mail did show that KLA engaged in retroactive pricing of options � and also that he had been demoted by Jensen and hadn’t liked working with her. Over the last few days, there’s been plenty of talk among defense lawyers about the intertwined nature of the options cases, both in terms of employees moving between companies and also in the limited number of white-collar defense lawyers with multiple clients. In the Brocade case, for example, defense lawyers have repeatedly tried to blame ex-CFO Michael Byrd, who is cooperating with the government � and who was previously employed at Maxim Integrated Products, another company with options woes. And Colleen Burgess, a former Brocade HR employee and the government’s first witness, said Monday that she had earlier worked at Apple Computer, another options-challenged tech firm. At KLA, the former general counsel, Lisa Berry, later went to Juniper Networks, another company with an ongoing options investigation. And then there’s the crossover between attorneys. In addition to Marmaro’s roles with KLA and Reyes, Jensen is represented by Keker & Van Nest, the same firm that represents former KLA CEO Schroeder. Orrick, Herrington & Sutcliffe, which represents the former Brocade HR employees, also represents KLA’s Dickerson as well as Berry. While the Brocade trial Tuesday shed a brief spotlight on KLA, that case has been quietly moving forward for months. Lawyers familiar with the case said it appears that Schroeder � whom Marmaro singled out in his probe � remains a government target, whereas Levy seems less likely to be charged.

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