Ex-Brocade Chief Reyes Seeks Mistrial Over Backdating - Bloomberg, 10 March, 2010

By Karen Gullo

March 10 (Bloomberg) -- Lawyers for former
Brocade Communications Systems Inc. Chief Executive Officer Greg Reyes
asked a federal judge to declare a mistrial in his stock-options
backdating case, saying a prosecution witness gave false testimony.

A former member of Brocade’s human resources
department testified on March 1 at Reyes’s trial that the stock options
granting process at his former employer, KLA-Tencor Corp., didn’t
involve “look-back pricing” that was used at Brocade, Reyes’s lawyers
said in a filing today in federal court in San Francisco.

KLA-Tencor restated financial results in 2006 and
was sued by securities regulators in 2007 because it backdated stock
option grants, the filing said.

“There is no doubt that the government knows”
that two KLA-Tencor grants discussed by the witness “were backdated,”
Neal Stephens, an attorney for Reyes, said in the filing.

The judge should either declare a mistrial or
strike the testimony and order that the jury be told of the error,
Stephens said. Assistant U.S. Attorney Adam Reeves didn’t return a
voicemail message.

Misconduct

Reyes’s conviction on backdating charges in his
first trial in 2007 was thrown out by a federal appeals court that
ordered a new trial, citing misconduct by prosecutors for telling jurors
that executives in Brocade’s finance department were unaware of the
backdating when, in fact, they knew about it.

KLA-Tencor agreed to pay $65 million in 2008 to
settle a shareholder lawsuit alleging executives accounted for stock
options grants improperly. The San Jose-based company settled an SEC
lawsuit over backdating in 2007 by agreeing not to violate securities
laws.

KLA-Tencor, a maker of semiconductor equipment,
and San Jose, California-based Brocade, the biggest maker of switches
for data storage networks, were among more than 100 companies that
restated financial results because of stock options backdating.

Stock options allow holders to buy shares at a
later date, usually at the trading price on the day they were granted.
Through backdating, companies change the grant date to a day with a
lower stock price, giving recipients built-in profits. Unless disclosed
and recorded as an expense, the practice is illegal because it hides
costs from shareholders and regulators.

Reyes’s trial began Feb. 22.

The case is U.S. v. Reyes, 06-00556, U.S.
District Court, Northern District of California (San Francisco).

--Editors: Michael Hytha, Peter Blumberg.

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