By Frank Reynolds, Andrews Publications Staff Writer

The Justice Department won a major victory Aug. 7 in its first stock-options-backdating case to go to trial when a federal jury in San Francisco convicted the former CEO of Brocade Communications Systems of criminal securities fraud and misrepresentation.

Gregory Reyes faces up to 20 years in prison and a $5 million fine after a high-profile five-week trial in the U.S. District Court for the Northern District of California.

He was convicted on all 10 criminal charges of doctoring the grant dates on stock options and hiding the cost from the software giant's shareholders.

The case had been closely watched in boardrooms and corporate law offices nationwide because it raised cutting-edge questions in an emerging area of law.

Scott A. Meyers, the chairman of the litigation practice group at Levenfeld Pearlstein LLC in Chicago and a veteran securities attorney, said that while the verdict was an important victory for prosecutors, there is reason for the government to temper its enthusiasm.

"Although the government will undoubtedly claim that this verdict vindicates its options backdating campaign, this case was actually much closer than it should have been under the circumstances," Meyers said.

"The government usually tries its best case first, the one with very ominous and largely undisputed facts, in the hope of obtaining an early victory which it can then leverage into settlements with other defendants in similar cases," he added.

Although the government had the "smoking gun" evidence of fraud - including an e-mail from Reyes that said backdating was "not illegal if you don't get caught" - the defense was able to make an easy case difficult, according to Meyers.

That may cause the government "some concern about its ability to win the closer cases going forward," he said.

The outcome will affect more than 150 companies and their directors and officers who are being investigated by the Securities and Exchange Commission, the Justice Department, and various state attorneys general for secretly manipulating the grant dates of stock options awarded to executives to give them a bigger payday.

Reyes and Brocade's former vice president of human resources, Stephanie Jensen, were the first to be charged with violating federal securities laws for backdating stock options after news of the widespread practice surfaced in 2005.

The company eventually restated its finances to reflect the extra cost of the backdated stock options awarded between 2000 and 2004.

In these backdating cases, prosecutors and disgruntled stockholders typically charge that when the grants are secretly pegged to a low point in the company's stock price history, rather than the date on which they were awarded, the recipients get an undisclosed windfall at the shareholders' expense when they later cash in the discount-priced options.

The government maintains that backdating is illegal if the corporate officials fail to account for the extra discounts as compensation costs.

Reyes' lawyer said in published statements that he planned to appeal. Prosecutors made no public comment on the conviction.

The outcome spurred speculation as to whether the government would now move ahead with a dozen other civil and criminal backdating cases, many of which involve executives of Silicon Valley companies, including Apple Inc., Mercury Interactive (now owned by Hewlett-Packard), McAfee Inc. and KLA-Tencor Corp.

Reyes' sentencing is scheduled for Nov. 21.