Gregory Reyes is the first chief executive to be sentenced to prison and socked with a huge fine for improperly back-dating stock options. Let's hope he is not the last. U.S. District Judge Charles Breyer sentenced Mr. Reyes,
the former head of Brocade Communications Systems Inc., to 21 months in jail and ordered him to pay a $15 million fine. The judge's crystal-clear message to corporate America is that white collar offenders will pay a price for their greed.
Mr. Breyer described Mr. Reyes' actions as theft, pure and simple. The judge told him that intentionally filing false accounting numbers is misconduct, and made it clear that he had little tolerance for such behavior.
Mr. Reyes' case was seen by many industry observers as a crucial test of just how seriously infractions regarding stock option backdating would be punished once they got to trial.
In this case, the jury found that he conspired to alter the grant dates of stock options awarded to executives at San Jose, Calif.-based Brocade and then took steps to falsify company documents to hide the transactions.
Let's hope that Mr. Reyes' penalties will be a harbinger of sentences in forthcoming cases involving stock option backdating.
As part of a federal Department of Justice investigation launched about two years ago, at least a dozen other chief executives have been criminally charged for improperly backdating stock options at their firms.
In addition, about 200 companies have been investigated by the Justice Department and the Securities and Exchange Commission, with many being forced to restate their financial statements, erasing billions of dollars in previously reported profits. The investigations also have led to the ouster of dozens of corporate officers.
One can only hope that as other greedy corporate leaders come to trial, they will face a judge and a jury as tough as those in Mr. Reyes' trial.
In a San Francisco courtroom filled with Mr. Reyes' relatives and friends, Mr. Breyer rejected a de-fense plea for a sentence of no more than 13 months, to be served in home detention or a halfway house. The judge said that a prison term would serve as a warning to other corporate officers about the consequences of lying to the government and the public.
"This offense is about honesty," Mr. Breyer said. "Every time Gregory Reyes falsified documents over a three-year period, he was lying.
"Corporate fraud is not a victimless crime. If widespread, it can affect the overall economy, employment, and, as we've seen with Enron [Corp. of Houston], people's life savings."
Indeed, stock option backdating is a concern not only for investors but also for financial advisers, who have an obligation to clients to steer clear of companies with questionable track records.
While backdating itself may not be illegal, misrepresenting the options in official reports to shareholders and the SEC — and thus un-derstating the company's ex-penses -and overstating its net income — is a crime.
The greedy executives who got caught with their hands in the cookie jar apparently believed there was nothing wrong in rigging the game in their favor. Neither did the companies who failed to disclose backdating to their shareholders, who bore the cost of transforming practitioners of outright fraud into multimillionaires.
Well, the party is over for Mr. Reyes, and he got stuck with the bill.
It remains to be seen just how many other corporate execs will be paying the price for their criminal misconduct.
Let's hope other judges follow Mr. Breyer's lead and deliver a message: Corporate executives who cheat investors and undermine public confidence and
trust in the capital markets belong in jail.
