Option backdating cases continue to be a focus of the regulators and the courts. The Brocade option backdating case, and the charges brought against its former CEO Gregory Reyes, were the first and perhaps the most high profile of these cases. Announced at a sensational joint press conference, the U.S. Attorney and former SEC Chairman Cox painted a portrait of crass criminal actions.

Yet, many option backdating cases and settlements later, the Ninth Circuit Court of Appeals reversed the conviction of Mr. Reyes “because of prosecutorial misconduct in making a false assertion of material fact to the jury in closing argument.” U.S. v. Reyes, No. 08-10047 (9th Cir. Filed August 18, 2009). This is the overwhelming case from the joint press conference? The ruling is significant. The point it did not consider is more significant.

Mr. Reyes was charged with securities fraud, falsification of corporate books and records, and violating related statutes and regulations. All of these charges were based on the backdating of stock options. At trial, the primary defense was that Mr. Reyes signed-off on the backdated grants without any intent to deceive. Mr. Reyes contended that he relied in good faith on the finance department which knew about the backdating and the falsification of the books.

The government took a different position. At trial, it presented the testimony of Elizabeth Moore, a low level finance department employee. Ms. Moore testified that she did not know about the backdating. The government theorized that since finance department did not know about the scheme it was thus powerless to get the books and records right.

In final argument the government reiterated Ms. Moore’s testimony, arguing that it should not have to bring in everyone from the department to establish the point. It went on to argue that in fact the finance department did not know about the backdating scheme.

The government knew better. During its investigation the FBI had interviewed senior finance department officials who stated that in fact they did know about the scheme. At the same time, the SEC filed charges alleging that senior finance officials engaged in fraud because they did know about the backdating scheme. Nevertheless, the district court refused to grant a mistrial. The court concluded that both sides knew about this evidence and engaged in misconduct in final argument. The government misstated the evidence. The defense argued the evidence without presenting it to the jury, an error almost as bad, the district court decided.

The Ninth Circuit did not agree with the district court. The government, as the prosecutor and representative of the United States, cannot engage in such misconduct the court ruled. Since the government misrepresented what it knew to the jury, the court reversed the conviction of Mr. Reyes and remanded the case for a new trial.

While the Ninth Circuit’s decision is clearly correct, based on the record, a more fundamental question is at stake. The reason the government’s final argument was wrong is because its case was wrong. A key part of the government’s case, according to the court’s opinion, was that the finance department did not know about the scheme. It presented this point of view by electing to have Ms. Moore testify and choosing not to present the other finance department witnesses the FBI had interviewed. In view of Ms. Moore’s position in the department and the other FBI interviews, the government clearly knew that, at a minimum, it was misleading the jury and that quite possibly its theory was wrong.

Viewed in this context the error by the government was far more serious than a misleading final argument. Indeed, it was fundamental to the trial process. In this case the government skewed the fact finding process through a selective presentation of the evidence. The misleading final argument was just the final brush stroke in a false picture painted through a win-at-all-cost mentality. As the Supreme Court said long ago while the prosecutor “may strike hard blows, he is not at liberty to strike foul ones. It is as much his duty to refrain from improper methods calculated to produce a wrongful conviction as it is to use every legitimate means to bring about a just one.” Berger v. U.S., 295 U.S. 78, 88 (1935). When the fact finding process is skewed as here, the remedy is not a new trial, it should be dismissal.