The SEC has finally settled its “backdated options” case against Greg Reyes, the former CEO of Brocade Communications, Inc. That case attracted a lot of notice when it was announced on July 20, 2006, because the SEC’s civil suit against Reyes was paired with a Justice Department criminal complaint that charged him with securities fraud. And that was the first indication that criminal prosecutions would be generated by the backdated-options frenzy, which was even then being fanned by a team of reporters from the Wall Street Journal’s left-leaning news pages.

(For many years, objective ratings of reportorial bias put the news pages of the Journal considerably further to the left than the news pages of the New York Times.)Greg Reyes, at left

Today, more than five years later, those parallel cases against Reyes (on the left in photo) have nearly ended. About a year ago, he started serving an 18-month prison sentence (although he is still appealing his conviction). And on Monday, August 15, 2011, the SEC and Reyes reached one of those “without admitting or denying” settlements that always lead me to assume the government has bludgeoned its victim into a state of exhaustion.

But what makes today’s announcement especially interesting is that we can finally see exactly how much financial harm the government believes Greg Reyes caused.  
The figure that one reads in the news ($845,000) is not large, given the ferocity with which Reyes was denounced. But even that amount exaggerates the matter. From the $845,000, one must subtract the $550,000 fine that the SEC imposed on Reyes simply as a penalty for wrongdoing. Then one must also subtract the $145,000 in interest that has accumulated on Reyes’s supposedly ill-gotten gains during the 5-plus years that it has taken to settle the case.
So what, in the end, was the whole Greg Reyes prosecution about? Apparently, it was about the government’s belief that Greg committed corporate fraud against his company and its shareholders in the amount of $150,000. That is the amount of allegedly ill-gotten money that the SEC settlement formally orders him to “disgorge.”
And remember that his fraud supposedly took place during the five years of 2000 to 2004 inclusive. So in the SEC’s scenario, Greg Reyes was allegedly making off with something on the order of $30,000 a year.
This was an entrepreneur who took a small start-up company and made it into a Silicon Valley leader, increasing the workforce by 600 percent and raising revenue from $24 million to $596 million.
Even if the SEC’s allegation are correct—which I doubt—this should have been a case where prosecutorial discretion dictated the mildest possible slap on the wrist. Had nineteenth-century America scrutinized and punished the missteps of its great industrialists as we do today, they would never have achieved productive greatness.
 But perhaps that is the purpose of SEC’s ten thousand commandments: To strangle productive achievement under the guise of enforcing virtue.


"Throw Out the Greg Reyes Verdict!"  by Roger Donway


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