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By lunchtime Friday, the federal prosecutors on the first stock options backdating trial must’ve known their weekend was ruined. Three days after Assistant U.S. Attorneys Timothy Crudo and Adam Reeves rested their securities fraud case against former Brocade Communications CEO Gregory Reyes, U.S. District Judge Charles Breyer ordered them to justify their case in writing. By 8 a.m. today, he told them, they must file a brief explaining what evidence they presented in trial showing that Reyes acted with criminal intent. Breyer was responding to a motion by defense lawyers to dismiss the case on the grounds that no rational jury could find Reyes guilty. The so-called Rule 29 motion is a common tactic by defense lawyers that seldom succeeds, though Breyer on Friday seemed to give Reyes lawyer Richard Marmaro’s more than a cursory glance. The motion, filed Tuesday, criticized virtually every facet of the government’s case. But on Friday morning, the judge wanted prosecutors to focus on a single aspect. “What I want them to address is essentially the mens rea requirement under the law,” Breyer said. The question, he said, was what Reyes knew. “In short form, I want to have some review of the evidence according to the prosecution of what is in the record showing the mens rea.” Crudo spent the next half-hour or so doing his best to convince the judge that he has, in fact, presented evidence of Reyes’ guilty mind. With the judge grilling him on each point, the prosecutor focused on testimony from a former Brocade employee and a lawyer who investigated Brocade’s options, two options-related e-mails, and the fact that Reyes signed a 10k � the company’s annual report � with erroneous information. Crudo initially spoke about June Weaver, a former HR employee at Brocade who testified that Reyes told her “it’s not illegal if you don’t get caught.” Weaver’s testimony had been undermined by the fact that she couldn’t remember if Reyes was talking about stock options. As Breyer put it Friday, “it was pretty untethered.” Crudo spent more time talking about an e-mail that Weaver sent to Reyes and others with an attachment that outlined the legal way to account for options. “My question is, what evidence do you have in the record that you point to that Mr. Reyes opened the attachment?” Breyer said.
‘In short form, I want to have some review of the evidence according to the prosecution of what is in the record showing the mens rea.’

Judge Charles Breyer


Crudo had none, and the judge had similar questions about the prosecutor’s other responses, including his reference to the testimony of Morrison & Foerster partner Craig Martin, who did a 2005 investigation of the company’s options problems. “Mr. Martin testified that the defendant was aware that in-the-money options had an accounting implication,” Crudo said. He also pointed to a 2004 e-mail Reyes sent to an executive at another company saying, “IT IS ILLEGAL TO BACKDATE OPTION GRANTS.” But Breyer was skeptical that those pieces of evidence showed that Reyes knew why there were legal implications to backdating options. The judge also bristled at Crudo’s invocation of the 2002 10k, which Reyes signed � and which stated, erroneously, that in-the-money options were properly expensed.<—Optional reading Table—->
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.

“A CEO can be prosecuted, criminally prosecuted, if there’s a misstatement in a 10k that he didn’t know was a misstatement?” the judge asked. If so, he added, “your cases are going to be very short. From now on, you’re going to take a 10k, you’re going to talk to a handwriting analyst, and you’re going to ask ‘is this the CEO’s signature?’” There wasn’t much left for the yellow-suited Marmaro � partner at Skadden, Arps, Slate, Meagher & Flom � to say when it was his turn, other than to agree with the judge’s skepticism on “probably the single critical issue in this case.” He said it was critical for Breyer to get rid of the case before it reached the jury because “there’s an anti-CEO bias out there.” Crudo declined to comment after the hearing, and Marmaro said he wouldn’t talk publicly about the motion until this week. But David Shapiro, a former interim San Francisco U.S. attorney and now a partner at Boies, Schiller & Flexner in Oakland, said judges are particularly hesitant to grant Rule 29 motions before a verdict is reached because they are unappealable unless issued after a conviction. There’s also a high standard for defendants � he and other former prosecutors said prosecutors can usually take solace in the fact that a Rule 29 motion requires that evidence be viewed in the most favorable light to the government � a point that Crudo repeatedly stressed. “They are filed in every case, and it would be a mistake for a defense lawyer to not file one,” Shapiro said. “But they’re very seldom granted.”

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