Former Brocade CEO Sentenced to 18 Months in Prison

Defendant Ordered to Surrender on September 10, 2010

June 25, 2010 - SAN FRANCISCO—Gregory L. Reyes, former Chief Executive Officer of Brocade Communications Systems Inc. in San Jose, Calif., was sentenced today to 18 months in prison and ordered to pay a fine of $15 million and a special assessment of $900, Acting United States Attorney Brian Stretch announced.

The Hon. Charles R. Breyer imposed the sentence. Judge Breyer also granted the government’s detention motion and ordered Reyes to surrender to the United States Marshal on Sept. 10, 2010.

The sentence followed Reyes’s March 26, 2010, conviction by a federal jury on four counts of securities fraud, four counts of lying to accountants and one count of false books and records. The jury found that Reyes had backdated stock option grants to falsely inflate earnings in the financial statements Brocade filed with the SEC. In its sentencing memorandum, the United States recommended a sentence of 37 months and a fine of $33 million.

Evidence at trial showed that Reyes falsified stock options grants at Brocade by pretending a meeting to grant the options had taken place on a date earlier than it in fact occurred and backdated the stock option grants to hide that he was looking back and selecting lower, more favorable stock prices. By backdating the options grants, Reyes made it falsely appear that the grants were made at fair market value with no compensation expense when in fact the grants had a built-in profit for which Brocade should have recognized a compensation expense. As a result of this fraud, Reyes granted millions of options that were in-the-money and had better prices than the outside investing public paid. At trial, the government’s expert, Gerald Fujimoto of Deloitte LLP, estimated the total amount of the fraud on the investing public at approximately $949,538,000.

Reyes, 47, of Saratoga, Calif., was indicted by a federal grand jury on Aug. 10, 2006. The maximum statutory penalty for each count in violation of 15 U.S.C. §§ 78j(b), 78ff and 17 C.F.R. § 240.10b-5 (securities fraud); 15 U.S.C. § 78ff and 17 C.F.R. § 240.13b2-2 (false statement to accountants); and 15 U.S.C. §§ 78m(b)(2)(A), 78 m(b)(5) and 78ff (false books and records) is 20 years in prison and a $5,000,000 fine.

At trial, First Assistant United States Attorney David L. Anderson and Assistant United States Attorney Adam A. Reeves prosecuted the case with the assistance of Paralegal Specialist Alycee Lane and Legal Assistant Jennifer Hiwa. The prosecution is the result of a five year investigation by the Federal Bureau of Investigation and the United States Securities and Exchange Commission.