Quite long ago, Whittaker Chambers said: “The great failing of American conservatives is they don’t retrieve their wounded.” That bitter reflection, but as applied to American businessmen, came to mind when I finished reading the story of Greg Reyes, a second-generation Cuban immigrant who rose through sheer talent, productivity, and vision to become, at 36, the CEO of Brocade Communications—a Silicon Valley company that revolutionized computer-storage technology (and whose revenues he increased twenty-fold in three years)—and then found himself sentenced to prison, his wealth destroyed, his career and life blown to bits. The crime of which he was convicted was the violation of a complex accounting regulation. The prosecution, even by advertising nationally, could find no investor who could assert coherently that the “misstated” information had any impact on their investment decisions.
But there must be more to it than that! I will offer two answers to that very understandable reaction. First, there was (you do remember?) the backdated options frenzy stirred up, beginning in 2005, by story after story in the Wall Street Journal, stories that only rarely mentioned that backdating options was not illegal and was practiced by hundreds of Silicon Valley companies, but spent paragraph after paragraph talking about corporate greed and describing the homes, cars, vacations, and other luxuries of the wealthy. In this case, anti-capitalist journalism led and set the pace for Securities and Exchange Commission enforcement and Justice Department prosecutions.
And, second, yes, there is more: And the “more” is more strained and incredible than the fact that accounting rule APB 25 was used by the SEC and prosecutors to destroy billions of dollars in the value of companies, lay waste executive careers, and put in prison—as examples or scapegoats—just five executives from the thousands of companies that “restated” company earnings when APB 25 was “clarified.”
There is a context, here, without which the backdated options frenzy and the stop-at-nothing drive by prosecutors to put Grey Reyes in jail makes no sense. In a recent article, David Stockman, the famous first Office of Management and the Budget Director under Ronald Reagan, charged that President Barrack Obama has appealed to class-warfare, resentment of the financially successful, more than any other Democratic president since FDR. It is not just Mr. Obama. He is of a generation that emerged from college, law school, and business school imbued with a crusading spirit against the supposed social destructiveness, immorality, and unfairness of capitalism—as personified by the most successful, wealthy entrepreneurs, businessmen, and, in particular, financiers.
We have seen this played out, again and again, by the waves of moral outrage against a particular businessman, or business practice, that is whipped up by ambitious crusading reporters and given a sense of legitimacy by government prosecutors. There have been genuine criminals in the business world, of course; few men have destroyed as much wealth, and hurt so many lives, by sheer fraud, as Bernard Madoff. But for every Bernard Madoff, whose crimes are clear and specific, there are dozens of businessmen of towering achievement, such as Michael Milken and Frank Quattrone, whose supposedly terrible deeds very few recall, except for the vague impression that they did something “awful.”
Such victims of media “rich-hunt” and prosecutorial ambition—in truth, victims of a political ideology and animus—rarely have many defenders. The moment a businessman, a financial firm, is reported to be “under investigation” or about to be indicted, the individual or firm is isolated, instantaneously “on trial.” The repeated pattern of politically and ideologically motivated crusades, energized by reporters hungry for the great expose, seems to matter little. Each time, the attention of the world is arrested by the new outrage.
Several years ago, the Atlas Society, a Washington, D.C., nonprofit organization of which I am a trustee, decided that it was time to fight for some balance. The Atlas Society created a Business Rights Center to bring facts, perspective, and tough analysis to the ever-more-frequent attacks on businessmen. The Center seeks out the facts and context of allegations against business, but, in particular, it focuses on individual businessmen who become “stars” of the media-prosecution dramas.
Several years ago, as the prosecution of individuals such as Greg Reyes ground on—long after the Wall Street Journal had finished riding the backdated options story, and few knew what happening in court, or why—the director of the Business Rights Center, Roger Donway, began two years of intensive research on the backdated options story. (Full disclosure: I am a trustee of the Atlas Society and Roger Donway is my brother.) The result, published last month by the Atlas Society, is Rich-Hunt: The Backdated Options Frenzy and the Ordeal of Grey Reyes (The Atlas Society, Washington, DC: 2012, 159 pages.) The book is the most carefully researched, detailed, and extensively documented report on both the issue and the scarcely believable experience of Greg Reyes with the “criminal justice” system.
The facts, context, and arguments (including the arcane aspects of some three decades of struggle by various accounting bodies to clarify the reporting requirements for backdated options) are presented with the utmost clarity in the book. I will not repeat them here. What the reader needs to know is that this book also has the drama, pace, and moral tension of a John Grisham novel. I will suggest that very few readers who don’t bring to the book the attitude that all-businessmen-succeed-by-hurting-people will come away without a shudder at what government regulators and prosecutors will do to bring down their man.
The first trial of Greg Reyes ended in conviction. The prosecutor pushed for a prison sentence of 30 years and a fine of $140,000,000 and Greg Reyes contemplated suicide. On appeal, the Ninth Circuit Court ruled that the prosecutor had lied and called for retrial. The same prosecutor was assigned to the second trial—and word leaked out that the U.S. Attorney blamed Reyes for staining the honor of his office and vowed revenge. The second trial mounted an entirely different attack on Reyes, one that directly contradicted the allegations made in the first trial. The baffled court said, “Let me make sure I understand. Because this is the first time I have heard this argument in three years…”
Greg Reyes was again convicted, and sentenced to 18 months in prison and a fine of $15,000.000. Although he was convicted of fraud, no evidence ever was advanced that any investor was hurt or had made any different decision about investing in Brocade because of the accounting misstatement. How could they have been misled? All the information was stated, just not in the form apparently required (“apparently” because accountants never could agree on it) by APB 25. Who was defrauded? No answer. Nor did the prosecutor show, at any time, that Reyes himself benefited from the backdating.
But by then, Reyes, after six years of hellish uncertainty, had demanded that he begin to serve his sentence—to get it over with, to get some certainty, to get some closure. His appeal to the Circuit Court of the second conviction was denied. The Supreme Court refused to hear the case.
He is now out on probation, barred from ever pursuing an ambition he had from the age of 12 to be a Silicon Valley CEO, barred by a settlement with the SEC from ever denying his guilt—on pain of re-imprisonment--and stripped of most of his fortune by the fine, the gigantic costs of his legal defense, and a huge settlement extracted by Brocade based on his conviction.
Greg Reyes now has no way to seek restoration of his reputation, no way to seek justice—the legal system has spoken. He has only the verdict of history, which is final. And that is a verdict that depends upon you, and me, and anyone who takes the time to read Rich-Hunt: The Backdated Options Frenzy and the Ordeal of Greg Reyes. It is time that those who understand that America’s greatness is inseparable from its commitment to capitalism, and that the heroes of our time are the entrepreneurs and the other great wealth-creators, retrieved our wounded.