Federal Criminal Defense Blog : Georgia Federal Criminal Defense Lawyer & Attorney : Gillen Withers & Lake Law Firm : White Collar Crime, RICO, Trial : Atlanta, Savannah, GA

From Law.com, the former Chief Executive Officer of Brocade Communications Systems, Inc., Gregory Reyes was sentenced to 18 months in prison yesterday in U.S. District Court for the Northern District of California for securities fraud and backdating stock options. The government had sought a 37 month sentence and a loss amount of $137 million.

Reyes' counsel attempted to argue that his lawyers should have done a better job in advising Reyes. U.S. District Judge Charles Breyer apparently found the argument an interesting one, stating "Yes, it's not a bad question to ask, 'Where were the lawyers?'" However, the Court rejected the argument, finding that Reyes was a sophisticated executive who understood what he was doing.

Reyes was first tried and convicted on the charges in 2006 and was sentenced to 21 months' imprisonment. However, the Ninth Circuit Court of Appeals reversed his conviction last year based on prosecutorial misconduct in interfering with witness testimony. Reyes was tried a second time in February and March of this year, and was convicted on nine counts. During the trial, Reyes' counsel blamed Brocade's outside counsel, attorneys with the law firm of Wilson Sonsini Goodrich Rosati, for failing to catch stock option backdating. However, Reyes' trial counsel never called anyone from the firm to testify. One of the documents at issue in the case was drafted by two experienced attorneys.

The Court received over 400 letters on Reyes' behalf.
 

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After the failure of its backdating case against Gregory Reyes, former Chief Executive Officer of Brocade Communications Systems, prosecutors with the U.S. Attorney's Office for the Central District of California are taking a new tack in its backdating case against former KB Home CEO Bruce Karatz, according to the National Law Journal. Karatz is alleged to have received millions in undisclosed income as a result of backdating stock options, and made $232 million in his last three years as CEO alone. The prosecution has decided to focus on Karatz's personal gain from the alleged scheme, and circumvent the defense--effective in the Brocade Communications Systems case--that backdating is not criminal where the corporation is aware of it, or where a defendant relies on the advice of attorneys or accountants. Defendants have also successfully argued that backdating is a legal and legitimate practice, and that many companies restate their income as a result of such conduct.

The U.S. Court of Appeals for the Ninth Circuit reversed Reyes' conviction in August based on the government's alleged prosecutorial misconduct in intimidating and influencing witnesses. The government's failure in the Reyes case came along with its defeat in 2008 in a backdating case against Kent Roberts, the former General Counsel of McAfee, Inc., a security software firm, and the dismissal of its case against two former executives of Broadcom Corp.

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On Monday, BAE Systems PLC, a United Kingdom-based, multinational defense contractor, pled guilty in the U.S. District Court in the District of Columbia to charges of allegedly conspiring to defraud the United States by impairing and impeding its lawful functions, allegedly making false statements about its Foreign Corrupt Practices Act (FCPA) compliance program, and allegedly violating the Arms Export Control Act (AECA) and International Traffic in Arms Regulations (ITAR), according to PR Newswire. U.S. District Judge John D. Bates ordered BAE Systems to pay a $400 million criminal fine. The fine is one of the largest ever imposed in a foreign corrupt practices/export control case. BAE Systems also agreed to retain an independent compliance monitor.

BAE Systems, the prime military contractor in the UK, was alleged to have represented to various U.S. government agencies from 2000 to 2002 that it would would create and implement policies and procedures to ensure its compliance with anti-bribery provisions of the FCPA and the Organization for Economic Cooperation and Development (OECD), but failed to implement the policies and procedures. BAE Systems was alleged to have saved approximately $200 million in failing to implement the policies and procedures.

The government also alleged that BAE Systems made payments to shell corporations and third party intermediaries which were not subject to the scrutiny required by the U.S. government. BAE Systems is alleged to have retained "marketing advisors" to secure defense contracts and to have allegedly concealed its relationship with these advisors from the U.S. government and made undisclosed payments to them, encouraging them to set up offshore shell corporations to receive payments. The company is alleged to have created one company in the British Virgin Islands in order to allegedly conceal its marketing advisor relationships, the identities of the advisors and how much they were paid; to help the advisors avoid tax liability, and  to obstruct investigating authorities and circumvent laws of countries which prohibit such relationships. BAE Systems is alleged to have made more than £135 million in payments through the shell entity.

BAE Systems was also alleged to have given benefits to an official of the Kingdom of Saudi Arabia in order to influence sales of fighter jets and other armaments to the country without properly reviewing or verifying the benefits pursuant to U.S. law. BAE Systems is alleged to have transferred millions through a bank account in Switzerland controlled by an intermediary in relation to the deal.

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As reported by Law.com, Bruce Karatz, Chief Executive Officers of KB Home, a home construction corporation based in Los Angeles, California, was indicted in the action of U.S. v. Nicholas, 2:09-cr-00203-ODW (C.D.Ca. 2009), on 20 counts of fraud for defrauding the company and its shareholders of millions of dollars in undisclosed backdated stock option over a period of seven years, and concealing the fraud from KB Home's  directors, compensation committee and shareholders. Karatz's trial in the U.S. District Court for the Central District of California is scheduled to begin on February 23.

Karatz's attorneys have requested a hearing regarding whether prosecutorial misconduct has tainted the government's case against Karatz. Karatz contends that two witnesses for the government--James Johnson, former Chairman of the Board of Directors' Compensation Committee for KB Home, and Gary Ray, former Vice President of Human Resources--initially believed that the stock options grant practice was lawful, but changed their position following contacts with the prosecution. Karatz's lawyers want to examine Johnson regarding why he denied allegedly defending KB Home's option granting process during an internal investigation by the company's outside counsel in his statements to prosecutors. 

The defense also wants to question Ray, who has pled guilty to obstruction of justice and is cooperating with the government, regarding why he had allegedly previously maintained that the process was "lawful and proper." Following is a link to

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Karatz's motion is based on an order in December by U.S. District Judge Cormac Carney in the action of U.S. v. Nicholas, SACR 08-00139 CJC (C.D.Ca. 2008), another backdating case, in which the Court dismissed the government's indictment against co-founder of Broadcom Corp., Henry Nicholas, and former Broadcom Chief Financial Officer William Ruehle, blasting the prosecution for "distorting the truth-finding process" by intimidating and improperly influencing key witnesses. Karatz also relies on the Ninth Circuit Court of Appeals' overturning last August of the conviction of former Chief Executive Officer for Brocade Communication Systems, Inc., Gregory Reyes, for backdating based on false statements by the prosecution in closing arguments that Brocade's finance department didn't know about backdating. A hearing on Karatz's motion has been scheduled for February 8.

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