Peter Smythe, P.C.

The Court of Appeals for the Ninth Cir­cuit recently vaca­ted Greg Reyes’s con­vic­tion for back­da­ting stock options and orde­red a new trial. The court vaca­ted Reyes’s con­vic­tion on the basis of pro­se­cu­to­rial mis­con­duct in jury argument.

Reyes, the CEO of Bro­cade Com­mu­ni­ca­tions of San Jose, was char­ged with seve­ral cri­mi­nal counts for fal­sif­ying cor­po­rate books and records stem­ming from his par­ti­ci­pa­tion in rewar­ding emplo­yees with grants of back­da­ted stock options. Back­da­ted stock options are not ille­gal, per se, but become ille­gal when the bene­fit is not recor­ded on the cor­po­rate books as a non-​cash com­pen­sa­tion expense to the corporation.

At trial, both the defense and pro­se­cu­tion ack­now­led­ged that Bro­cade enga­ged in back­da­ting stock options and that Reyes had sig­ned off on them. The cru­cial issue was whether the finance depart­ment knew about the options so that it could account for them in the corporation’s finan­cial docu­ments. Reyes argued that the finance depart­ment did know about the options and he had relied on the finance depart­ment to make the pro­per accoun­ting adjust­ments. The Govern­ment argued that no one in the finance depart­ment was aware of the options so it could not make the accoun­ting adjust­ments and it made this argu­ment to the jury.

The pro­blem for the Govern­ment was that there was evi­dence in FBI wit­ness inter­views and an SEC inves­ti­ga­tion that there were seve­ral emplo­yees in the finance depart­ment who were well aware of the prac­tice. The court found that the Government’s mis­con­duct was not harm­less. It said:

In repre­sen­ting the Uni­ted Sta­tes, a fede­ral pro­se­cu­tor has a spe­cial duty not to impede the truth.… A prosecutor’s opi­nion carries with it the impri­ma­tur of the Govern­ment and may induce the jury to trust the Government’s judg­ment rather than its own view of the evi­dence. For this rea­son, it is impro­per for the govern­ment to pre­sent to the jury sta­te­ments or infe­ren­ces it knows to be false or has very strong rea­son to doubt.… Deli­be­rate false sta­te­ments by those pri­vi­le­ged to repre­sent the Uni­ted Sta­tes harm the trial pro­cess and the inte­grity of our pro­se­cu­to­rial system.

While the court rejec­ted Reyes’s motion to dis­miss the indict­ment, it vaca­ted his con­vic­tions and orde­red a new trial.

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