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Thursday, August 09, 2007

Silicon Valley's Wake Up Call - Go Directly to Jail

Silicon Valley received a serious wake-up call yesterday. 

Gregory L. Reyes, former CEO of Brocade Communications Systems Inc. of San Jose, faces the possibility of 20 years in prison and a $5-million fine for rewarding key employees with options to buy company stock at artificially low prices.

Ex-CEO guilty in backdating of options - Los Angeles Times

The conviction, a conviction on 10 counts, is making all of the Silicon Valley companies that have pushed options inconceivably backdated those options rethink their safety zone.  Dozens of companies including Apple Computer have been caught up in snared in backdating trouble.

The conviction of the CEO of Brocade is the wake-up call to all of these companies and their CEOs and CFOs that juries could take away their freedom and send them to jail for what they look at as a simple way to strategically place funds within the budgets of their corporate accounts.

Backdating options is equivalent to cooking the books and it's a crime.  It was not a crime with teeth until the jury brought home a conviction.  Now it's a serious crime and CEOs will be much much more careful in their defense.  The problem is the damage is already done and they can take back what they've been doing for years or done in the past.

Corporations can hang their hats on their auditors and blame their auditors for failing to find wrongdoing in their backdating scenarios.  Anyone that wants the Enron case knows that auditors are fallible and when they fail it's the companies that pay the price not the auditors.  There is no scapegoating to an audit firm when you break the law.

If nothing else, prisons around the country might see a higher quality of coffee mugs showing up behind bars as CEO's emigrating to jail take some of those great personalized cups into that notorious big house with lots of bed rooms replete with built in bathrooms and no swimming pools anywhere.

It's likely that a number of people that are under investigation are going to look at this recent conviction and realize that the consequences are serious and they're going to start talking to prosecutors in trying to establish a deal.  That's good for the people at lower levels in the company and very bad for the CEOs of companies that are being targeted.