I was extremely disappointed to read that the Ninth Circuit Court of Appeals affirmed the conviction of my friend, Greg Reyes. We became friends while he served his sentence inside the federal prison camp in Taft, California. For 11 months, we spent a portion of every day talking and I learned a great deal from him. I know how much pain the criminal charges brought to his life.
Despite the significant differences between our sentence lengths, I had a great deal of empathy for Greg because as I listened to him, I became convinced that his imprisonment represented a severe injustice. From my perspective, our criminal justice system has lost perspective when those within it work to incarcerate citizens for decisions they make during the course of business, especially when those decisions lacked any criminal intent and any effort at self enrichment. The following represents some of what I learned about Greg's inspiring story.
During Greg's tenure at Brocade Communication Systems, he served the shareholders as chief executive officer and chairman. In that capacity, he did his best to create value by turning a high-technology start-up into a world-class corporation that would create enormous value for shareholders, customers, and employees. Under his leadership, Brocade thrived. It was one of the hottest technology companies during the euphoric times that preceded the turn of the century. With its fiber-optic networking products, Brocade unlocked storage capacity for its customers, enabling them to both make and save money. The stock market rewarded Brocade with a peak market valuation that at one point exceeded $24 billion.
Greg graduated from St. Mary's University with a degree in business but he did not attend graduate school. Instead, he built his career through his drive, charisma, and effectiveness at setting clearly defined goals, establishing plans that would lead to success, and leading his team to execute those plans in ways that would consistently crush the goals he set. Without an MBA, Greg rose to the highest levels of corporate leadership. He trusted in his management team and board members -- who were the best in the world at what they did -- to advise him on the complexities of complying with all rules and regulations associated with running a publicly traded company.
Greg considered it a real coup when Larry Sonsini, of the venerable Silicon Valley law firm Wilson, Sonsini agreed to join Brocade's board of directors. Larry's reputation preceded him as one of the nation's most well known and respected corporate governance experts. Mr. Sonsini's advice came at a steep price, as in exchange for advising Greg and Brocade's board of directors, Larry demanded compensation through stock that the market came to value at more than $50 million. Nevertheless, Greg wanted the best advisors, and he agreed to meet Sonsini's compensation demands.
Greg led a team of talented executives who oversaw a staff of thousands. Together, Greg and his team were able to partner with some of the world's best known technology companies, including IBM, Hewlett Packard, Dell, EMC, and others that sold storage equipment to businesses and governments around the world. Meeting the demand required Brocade to hire hundreds of new employees each week. Like all Silicon Valley technology companies, Brocade offered stock options as part of each new hire's total compensation package. As employees contributed to Brocade, they had the potential to earn additional stock options through merit.
Awarding stock options was necessary to attract the most talented employees in Silicon Valley during those robust times, and Greg presided over a transparent policy that Larry Sonsini approved as being in compliance with all SEC rules and regulations. That policy would ensure every employee had an opportunity to share in the company's success. In an effort to streamline the process of ratifying stock options, Brocade's board of directors granted Greg sole discretion to approve options for rank and file employees. His executive team published the company's stock option granting practices on Brocade's intranet computer system. Greg relied upon Mike Byrd, Brocade's chief financial officer, to establish the policies for the manner in which Brocade would account for all stock option grants. After all, Mike Byrd was a seasoned CFO who had come to Brocade after serving as CFO for another well known publicly traded Silicon Valley technology company.
Yet Mike Byrd, with Larry Sonsini's approval, put a system in place that ran afoul of an obscure SEC rule that had to do with the accounting of stock options. It's important to understand that the issuing of stock options does not represent the expenditure of any cash. Stock options provide recipients with the right to purchase a specified amount of stock at a predetermined price, known as the strike price. Recipients cannot exercise their stock options until the instruments vest, at which time they can begin exercising their right to sell those options in the open market.
During the late 1990s and early years of the new century, Brocade's stock price was white hot. Those volatile stock prices created a complication in the hiring process. Employees who were hired early during a given quarter could receive a stock option at a much lower strike price from employees who were hired late in the quarter. In an effort to ensure fairness for all employees hired during a given quarter, Mike Byrd oversaw the finance department's accounting of all stock option policies, including those ensuring that each employee would receive their options with a strike price that was at the low point of a given quarter. Larry Sonsini, the corporate governance expert who sat on the board, approved this plan and it was implemented as a matter of principle at Brocade. In time, it became known under the nefarious sounding name of "backdated stock options."
Backdating stock options is not illegal. After all, as I mentioned earlier and as the Ninth Circuit Court of Appeals made clear in its ruling, the granting of stock options does not represent a cash expense. What the SEC did require, however, was that a publicly traded company insert a statement in the financial footnotes that described the "noncash expenses" associated with backdated stock options. Mike Byrd and the finance department that he led failed to account for the backdated stock options in the appropriate way. They were not alone. More than 100 publicly traded technology companies were found to have violated the obscure SEC rule associated with backdated stock options. Yet Brocade Communications came to the attention of the Securities and Exchange Commission and the Department of Justice at a particularly bad time.
It was a time when markets were falling and there was a backlash against the titans of wealth. As an executive who the market rewarded with $500 million for his role in building Brocade, Greg Reyes became a perfect scapegoat.
After the Ninth Circuit Court of Appeals published its opinion, Roger Donway, an investigative journalist from the Atlas Society, published Justice Denied, an outstanding article that clarified the legal complexities of Greg's case. Mr. Donway wrote much more eloquently about these esoteric issues than I could. He used an elegant and particularly effective analogy that would help readers understand the absurdity of "noncash" expenses, showing exactly why noncash expenses were immaterial to investor decisions. I recommend Mr. Donway's excellent article for readers who want a better description of Greg's case.
Whereas Mr. Donway writes to shed light on the injustices associated with Greg's conviction, I write as a long-term prisoner who had the privilege of befriending Greg during the time that he served inside the boundaries of a federal prison. I've been a prisoner of this system for a quarter century now, and during that time I have not always been able to relate to men who served sentences that were shorter than mine. But in Greg I did not see a fellow prisoner. I saw a leader of men, one who led with integrity and dignity. We became friends soon after he arrived at the Taft federal prison camp and I spent hundreds of hours listening to descriptions of how he built his career, to his philosophy of leadership, to the ways that he viewed his role in society.
Besides listening to Greg, I witnessed his determination to make the most out of a difficult time. We exercised together regularly. During his first five months in the camp, he shred more than 60 pounds through extreme exercising, carving out an athletic physique that men work decades to build. He had never been a runner before, but we pushed through more than one marathon distance together. I admired his discipline, his ability to focus, his immense capacity for work. And when I needed help, Greg reached over, shook my hand, said he believed in the value I was striving to create and offered his assistance freely, generously.
It saddens me to know of the pain he endures now. It's especially unfair when contrasted with the recent news concerning Supreme Court Justice Clarence Thomas; the jurist has admitted to misleading compliance experts with regard to $700,000 that his wife earned. Yet Greg stands convicted, despite his reliance on his finance expert, Mike Byrd, and Larry Sonsini, his consiglieri who was supposed to ensure his compliance with all SEC regulations. Greg was betrayed, stabbed in the back by those he trusted, but I have all the confidence in the world that he will triumph over this setback, advancing on to make many enormous contributions to the lives of others, and to society as a whole.