Oral Arguments in the Greg Reyes Case, The Atlas Society | Ayn Rand, Objectivism, Atlas Shrugged

May 11, 2011 -- Yesterday, May 10, the backdated options witch-hunt began drawing to its close. A three-judge panel from the Ninth Circuit Court of Appeals heard oral arguments in the case of Greg Reyes, the former CEO of Brocade, who was convicted of committing securities fraud by backdating options at his company. Coincidentally, Reyes was the first person to be indicted in connection with backdated options, back in 2006. Now his case bodes to be the last resolved, even as he languishes in prison.

Unfortunately, the appellate court was not able to consider the most general policy questions in the Reyes case: How did the SEC come to institute an absurd rule of accounting for backdated options? Who made the decision to criminalize violations of that absurdity? And why were only a few people targeted for criminal prosecution in the matter? The legal questions that the appeals court was asked to consider included: Was there a substantive misstatement of the law in Reyes’s trial? Was there prosecutorial misconduct? Was the conviction beyond the pale, given the evidence?

The Issues

Fraud. To understand the Reyes case, it is first necessary to understand that there is nothing wrong with backdating options. It is not a crime or even a violation of SEC regulations—if the options are properly accounted for in a company’s financial statements. If they are not properly accounted for, that is still not a crime, though it is a violation of SEC regulations. To prove a crime, and specifically to prove fraud, the prosecution had to argue that Greg Reyes improperly accounted for Brocade’s backdated options on purpose, in order to deceive investors about the company’s condition and thus keep up its stock price.

The defense team argued that prosecutors failed to present any evidence that any investor was or ever could have been deceived by Brocade’s financial statements. Yes, the backdated options were not properly accounted for in Brocade’s financial statements, but only in one part of those statements. The options were properly accounted for in another section of the financial statements. So, where was the deception? The more reasonable interpretation is that Reyes relied on his financial department to prepare the company’s financial statements and that department got things wrong in one place but right in another.

Greed. To provide a motive for the alleged fraud, prosecutors in the Reyes case implied to the jury that Greg Reyes had granted himself backdated options in order to “pad his own pocket.” The defense team showed that, under the corporate bylaws at Brocade, it was impossible for Reyes to issue himself options of any kind, backdated or otherwise. As the prosecutors well knew, Reyes’s options could be granted only by independent members of the board of trustees. Therefore, the defense argued, the jury’s decision to convict Reyes rested on a deception perpetrated by the prosecution.

Now, to the average citizen, I imagine, there is one serious weakness in the defense teams’ arguments. In each case, the defense says that prosecutors deceived the jury and knew that they were deceiving the jury. Is that credible? Would the members of a U.S. Attorney’s office do that?

Unfortunately, we know that they would—because we know that they did. The oral arguments that were heard on May 10 were appeals from the second trial of Greg Reyes. The first trial was thrown out for prosecutorial misconduct—specifically, for lying to the jury.

The court refused to retract the obvious implication that the government prosecutors were knowing liars.

The defense of Greg Reyes has always been that he relied on his finance department to understand the arcane rules of accounting properly for backdated options, and that his finance department failed him. Against that defense, prosecutors in the first case argued that Reyes had kept the scheme hidden from the finance department so that they would not be able to account properly for the backdated options. In the government’s summation, a prosecutor reminded the jury that one low-level clerk in Finance had said she had known nothing about the backdating. The prosecutor then asked the jury: “Did you need everybody in the finance department to come and tell you that they didn’t know?” Yet even as he spoke that prosecutor knew very well that executives of the Finance Department had told the FBI that they were aware of the backdating. That prosecutor knew very well that the defense had been unable to call members of the Finance Department as witnesses to support Reyes’s argument only because the government had refused to grant them immunity from prosecution. It was on this basis that the Ninth Circuit Court of Appeals threw out Reyes’s first conviction. The government then asked the appeals court to strike from its opinion “any suggestion that the prosecution acted deliberately in arguing false facts to the jury.” But the court refused to do so. It refused to retract the obvious implication that the government prosecutors were knowing liars.

But surely, one might suppose, those prosecutors who were implicitly called liars by the circuit court are no longer with the U.S. Attorney’s Office, or at least they were barred from having anything to do with the second trial Greg Reyes. No. One of them was among the people who decided that Reyes should be subjected to the ordeal of another trial. In fact, incredible though it may seem, that same prosecutor was put right back on the Reyes case, where he delivered the government’s opening and final statements. Under the circumstances, there is absolutely no reason to suppose that the government has acted honorably in the second Reyes trial, and no reason to think that it seeks justice rather than vindication.