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Prosecutors in the first stock option backdating trial opened an important door Friday � and lawyers for defendant Gregory Reyes barged right in. In his trial on charges of fraudulently manipulating option prices for employees, the former CEO of Brocade Communications has been unable to bring up a key argument that his lawyers were making publicly for months before proceedings started: that Brocade is one of dozens of companies with similar option issues, and was singled out unfairly. Until Friday morning, Reyes’ lawyers with Skadden, Arps, Slate, Meagher & Flom were forced to argue as if the company’s option manipulation occurred in a vacuum. Then the government brought up Delaware Investments analyst Steven Catricks, whose firm held a sizable chunk of Brocade stock. Catricks testified to the importance of full and honest financial disclosure by companies, and, when questioned by Assistant U.S. Attorney Timothy Crudo, said it was important for a company to truthfully disclose noncash expenses, such as in-the-money stock options. Reyes’ lead lawyer, Richard Marmaro, seized on that point before he began his cross-examination, and � before the jury re-entered the room � convinced U.S. District Judge Charles Breyer to let him question Catricks about other companies with option woes in which Delaware has holdings. This allowed the defense lawyer to bring more than a half-dozen companies with major option backdating problems into the case, most notably Broadcom Corp., which restated more than $2 billion in expenses due to its backdating pattern. Catricks agreed with Marmaro’s assertion that “Delaware holds a lot of corporations that have similar problems to Brocade and Broadcom,” including Barnes & Noble, Home Depot and the Cheesecake Factory. With most of those companies, Catricks said, his firm held onto the stock despite the announcements of option improprieties. Indeed, Catricks said, Broadcom’s stock went up when it announced its restatement. Marmaro seized on this answer, which seemed to frustrate the witness. Catricks tried to elaborate on why the market reacted favorably to Broadcom’s announcement before Breyer stopped him. Catricks’ admission played into Marmaro’s larger argument: that noncash expenses don’t materially affect a company’s value. Catricks did say he unloaded stock in a couple of companies, including Mercury Interactive, due to their disclosure of option woes. But when Marmaro asked him whether companies’ assurance that restatements for expenses wouldn’t affect revenue comforted him, Catricks said such a statement “makes me feel OK.” Catricks also acknowledged that two of his co-workers were primarily responsible for the fund’s Brocade investments. On redirect, Crudo tried to re-emphasize the importance of executive honesty, asking: “Whether it’s Steve Jobs or any other CEO of a company you’re putting money into, you’re relying on the integrity of the CEO.” Crudo also tried to counter the implication that noncash expenses are inconsequential. Catricks said that while not the “most important” metric, such expenses factor into his assessments of a company. The testimony Friday is the latest shift in a trial that’s been difficult to handicap since it began two weeks ago. While it’s been predicted since the beginning that the government would have trouble establishing intent and directly tying Reyes to the option problems, an HR employee last week testified that Reyes told her “it’s not illegal if you don’t get caught.” But the witness, June Weaver, didn’t remember whether Reyes was referring to stock options, and subsequently was unable to answer a long string of questions on cross-examination. On Friday, Breyer said he expects the defense to file a motion for a judgment of acquittal early next week, once the government rests its case.

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