ANOTHER GUILTY PLEA IN GALLEON

The blue collar tactics continue to yield guilty pleas for the government in the Galleon insider trading cases. This week Robert Moffat, Jr. pleaded guilty to a two count information charging conspiracy to commit securities fraud and securities fraud based on his role in the on-going cases. U.S. v. Moffat, (S.D.N.Y. Filed March 29, 2010). This is the latest in a series of guilty pleas the government has secured in these cases as discussed here.

From August through October 2008, defendant Moffat engaged in an insider trading scheme, tipping Danielle Chiesi regarding three stocks. Mr. Moffat is a former senior vice president and group executive at IBM. Ms. Chiesi is a friend who worked at New Castle Partners, an equity hedge fund. The tips involved IBM, Advanced Micro Devices, Inc. and Lenovo Group Ltd., where Ms. Chiesi was a non-voting member of the board.

In September 2008, Mr. Moffat provided Ms. Chiesi with inside information about IBM and Lenovo. Specifically, he told Ms. Chiesi about the financial performance for each company for that quarter prior to the release to the information.

During the same time period, two conversations in which Mr. Moffat provided his friend with inside information were intercepted with a wire tap and captured on tape. In an August 22, 2008 telephone call, Mr. Moffat told Ms. Chiesi about a business deal in which AMD would spin off its manufacturing business into a separate entity. IBM was involved in the transaction because AMD needed a license from the company in connection with the deal. Mr. Moffatt assured Ms. Chiesi that there was “zero” chance the deal would not go through.

In a second intercepted telephone call one month later, Mr. Moffat told Ms. Chiesi that AMD was going to try and announce the deal by October 10, 2008. Prior to the actual deal announcement on October 7, 2008, Ms. Chiesi had New Castle trade in the securities of AMD and IBM. Despite having inside information, the trades were not profitable according to the court papers because of the market turmoil. The date for sentencing has not been set.

Mr. Moffatt has also been named as a defendant in the parallel SEC case, discussed here.

REYES IS CONVICTED AGAIN, BUT TROUBLING QUESTIONS PERSIST

Government persistent has paid off, at least for now. Gregory L. Reyes, former Chief Executive Officer of Brocade Communications Systems, Inc., was convicted of securities fraud based on option backdating claims for a second time on Friday. U.S. v. Reyes, Case No. 06-0056 (N.D. Cal.). After three and a half days of deliberation, the jury returned guilty verdicts on four counts of securities fraud, four counts of lying to accountants and one count of false books and records. A not guilty verdict was returned on a conspiracy count.

The charges are based on claims that Mr. Reyes falsified option grants by creating fictitious documents to conceal the fact that the options were being backdated to obtain more favorable grant dates. The documents made it appear that the grants were in fact issued at fair market value when they were not. As a result of these practices, the options had a built in profit. At the same time the company did not recognize the related expense, resulting in false financial statements and filings. Mr. Reyes was granted millions of options that were in the money as were other employees. A government expert estimated that the amount of the fraud on the investing public was about $950,000.

The case against Mr. Reyes is one of the most high profile options backdating cases. The criminal charges and a parallel SEC enforcement action were first announced at a joint press conference discussed here. The first trial against Mr. Reyes also resulted in a guilty verdict. That conviction was overturned by the Ninth Circuit Court of Appeals, as discussed here, based on prosecutorial misconduct. Sentencing of Mr. Reyes is scheduled for June 24, 2010.

Overall, the government has had mixed results in its criminal option backdating cases. In some instances it has obtained convictions such as in the case last year against James Treacy, former President and COO of Monster Worldwide, U.S. v. Treacy, No. 1:08-cr-00366 (S.D.N.Y.), although that case is on appeal to the Second Circuit, No. 09-3939-CR, discussed here. In others, such as the case against former McAfee, Inc. General Counsel Kent Roberts, the jury has returned not guilty verdicts, discussed here. U.S. v. Roberts, No. 1:07 –cv- 00407 (N.D. Cal.). Others have been dismissed because of prosecutorial misconduct, such as the cases against former co-founder Dr. Henry Samueli and its former CFO William J. Ruehle, U.S. v. Nicholas, Case No. SACR 08-139 (C.D. Cal.), discussed here. This track record raises significant and troubling questions about the criminal prosecution of these cases, the ever blurring line between civil and criminal securities cases and prosecutorial charging discretion as also discussed here. It also ensures that the last chapter in the Gregory Reyes case has yet to be written.