Appeal from the United States District Court for the Northern District of California Charles R. Breyer, District Judge, Presiding D.C. No. CR-06-00556-1-CRB, D.C. No. CR-06-00556-2-CRB
The opinion of the court was delivered by: Schroeder, Circuit Judge
Argued and Submitted May 12, 2009-San Francisco, California
Filed August 18, 2009; Amended November 5, 2009
Before: Mary M. Schroeder and Stephen Reinhardt, Circuit Judges, and Louis H. Pollak,*fn1 Senior District Judge.
Gregory Reyes and Stephanie Jensen appeal from their convictions for falsifying corporate books and records, and related charges, stemming from their participation in a scheme to reward employees with grants of backdated stock options. The options were backdated to a time when the company's stock price was low, but the options were not recorded on the company's books as an expense of the corporation, so the books showed the corporation to be more profitable than it was. The convictions represent the first criminal convictions for a backdating practice that was widespread in the late 1990s, particularly in the Silicon Valley, where the appellants' company was located.
We reverse Reyes' conviction because of prosecutorial misconduct in making a false assertion of material fact to the jury in closing argument. We affirm Jensen's conviction but vacate the sentence and remand for resentencing because the sentence improperly included an obstruction of justice enhancement for which responsibility lay primarily with Jensen's lawyer.
II. Facts and Procedural Background
Gregory Reyes was the Chief Executive Officer ("CEO"), and Stephanie Jensen was the Vice-President of the Human Resources Department, of Brocade Communication Systems, Inc. ("Brocade"), based in San Jose, California. The company is publically traded and engaged in the high-tech business of developing and selling network equipment and providing networking solutions. Because of the competitive demand for qualified information technology personnel in the Silicon Valley, the company began the practice of offering new personnel and valued employees compensation in the nature of stock options.
A stock option is the right to purchase a share of stock from a company at a fixed price, referred to as the "strike price," on or after a specified vesting date. In a rising market, stock options generally help companies recruit employees desiring to share in the company's growth and help persuade employees to stay with the company so that their increasingly valuable options may vest and be exercised.
In general, companies grant options with a strike price equal to the market price on the date the options are granted. "Backdating" stock options refers to the practice of recording an option's grant date and strike price retrospectively. Back-dating is not itself illegal, provided that the benefit to the employees is recorded on the corporate books as a non-cash compensation expense to the corporation, in accordance with an accounting convention promulgated in 1972 referred to as Accounting Principles Board Opinion No. 25. It is not now disputed that the options in this case were not recorded in the books as having been backdated.
On August 10, 2006, the government charged Reyes and Jensen with securities fraud, falsification of corporate books and records, and violating related statutes and regulations. Their cases were severed for trial and represented the first such prosecutions to go before a jury.
The jury convicted Reyes of conspiracy in violation of 18 U.S.C. § 371; securities fraud and making false filings with the Securities and Exchange Commission ("SEC") in violation of 15 U.S.C. §§ 78j(b) and 78ff, and 17 C.F.R. § 240.10b-5; falsifying corporate books and records in violation of 15 U.S.C. §§ 78m(b)(2)(A) and 78ff, and 17 C.F.R. § 240.13b2-1; and making false comments to auditors in violation of 15 U.S.C. § 78ff and 17 C.F.R. § 240.13b2-2.
At trial, Reyes' principal defense was that he, as CEO and sole member of the Board of Directors' Compensation Committee, signed off on the backdated options without any intent to deceive. He sought to establish reasonable doubt as to his intent by contending that Brocade's Finance Department was well aware of the backdated options and the fact that the options were not properly expensed out on the books. Reyes also argued that he relied in good faith on the accuracy of the Finance Department's documentation when he signed off on false financial statements.
The government witnesses provided evidence as to how this scheme operated and how Reyes participated in the scheme. One of the witnesses, Elizabeth Moore, who was an employee of the Finance Department and who administered Brocade's stock options, testified that she and other members of the Finance Department did not know that the backdating was occurring.
Other, higher-up Finance Department employees, however, had given statements to the FBI describing their knowledge of the backdating scheme. Both prosecution and defense counsel were familiar with these statements. Those employees, who were themselves subject to possible criminal prosecution and had been targets of SEC civil suits, did not testify.
During trial, Reyes' position was that he relied on the Finance Department to make sure that the corporate books were accurate, and that he was not responsible for the false records. Reyes' counsel, in closing argument, therefore told the jury that the Finance Department knew about the backdating, thus supporting the defense position. The prosecutor, however, told the jury that the employees in the Finance Department "don't have any idea" that the backdating was occurring. The prosecutor thereby asserted to the jury facts that he knew were belied by the statements to the FBI from responsible Finance Department officers, and by SEC complaints that had been filed against some of the Finance Department employees alleging they knew about the scheme.
Reyes moved for a new trial on the basis of prosecutorial misconduct. He also sought a new trial on the separate basis of what he asserted to be a recantation of Elizabeth Moore's testimony that she did not know about the backdating. The district court denied the motions. Earlier, the court had denied a motion for directed verdict for insufficiency of the evidence to establish materiality, i.e., that knowledge of the backdating would have affected the judgment of a reasonable investor.
The district court sentenced Reyes to 21 months' imprisonment, and imposed a $15 million ...