Former Brocade Communications CEO Gregory Reyes became the not-so-accidental poster boy for the scourge of stock options backdating that threatened the very life blood of Silicon Valley compensation. Convicted on ten counts of fraud in a criminal case, Reyes shouldered the burden of hundreds of companies that may have been doing the exact same thing.  His case however hinged not on the backdating itself -- which is legal as long as you fill out the proper paperwork in advance -- but the lies a jury believed he told in covering his tracks to deliver millions in wealth to those holding those options.

His case sent a chill down every executives' back in these parts who take part in backdating, or even offering stock options to employees.  Even Apple

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[AAPL  Loading...      ()   ] CEO Steve Jobs was caught up in these witch-hunt investigations only to be lauded later by the SEC with no finding of wrongdoing for his and Apple's deep cooperation.

But Reyes would see a different outcome. A convicted felon. Sentenced to 21 months in prison. A $15 million fine. And that doesn't even begin to address the many civil suits, including one by the Securities and Exchange Commission that he also faced. It doesn't get uglier.

And it was arguably the highest profile conviction of a white collar crime in Silicon Valley this side of superstar investment banker Frank Quattrone, who stood by Reyes at his sentencing hearing, and whose own obstruction conviction was overturned in 2006.

In his emotional statement to the court the day of his sentencing, as captured by gigaom.com, Reyes told the judge, "I've tried to live a good life, to be a positive influence on my friends and family; I've tried to help people. This experience has humbled me in more ways than I am capable of expressing in words, but I am determined to learn from it and become a better person because of it. I ask for your mercy and your compassion and I promise (you that) you will not regret any leniency that you show me today."

Judge Charles Breyer told the court, "To the argument that the accounting and reporting was too complicated, Gregory Reyes never gave the auditors a chance because he lied to them.  To the argument that the public would not care, the answer is simple. A jury in this court (rendered) it. The offense is about honesty. Every time Gregory Reyes falsified a document, repeatedly over three years, he was lying. That is the core of the criminal conduct."

Today, a far different story. A federal appeals court reversed the entire thing!  Not because of some legal technicality but because of prosecutorial misconduct.  In the 21-page ruling, the 9th US Circuit Court of Appeals excoriated the Feds, setting aside all 10 counts of illegal backdating. 

No more 21 month prison sentence to worry about, and I guess Reyes can stop payment on that $15 million fine.  Reyes and his legal team had argued that the government kept key evidence from the defense, and in doing so, misled the jury. 

"In representing the United States, a federal prosecutor has a special duty not to impede the truth," today's ruling said.  "The record demonstrates that the prosecution argued to the jury material facts that the prosecution knew were false, or at the very least had strong reason to doubt."

Ouch.

I was at the press conference with the federal prosecutors leading this charge, with each of them slapping each other on the back for a job well done.  The collateral fall-out from this case was felt far and wide.  The feds seemed to have tapped a revenue-generation vein in the form of settlements and prosecutions resulting from stock options backdating.  Some might argue this was a victimless crime.  Others might argue that compensation in the valley had run amok and companies needed to be reeled in.

What needed to be reeled in instead was the prosecutors who played fast and furious with the facts of this most important of cases, and you have to wonder whether the whole stock options backdating legal furor was really just a revenue red herring instead for the government looking for new ways to raise cash.

Meantime, today's ruling still gives the US Attorney's office the option of retrying its case against Reyes, or dropping it.  But with lynchpin evidence that might have exonerated him in the first place floating around out there, a retrial is unlikely.  Not to mention the millions of dollars it might take to start this all again, in addition to the millions the feds have already spent. 

Separately, another player in this drama, HR chief Stephanie Jensen, didn't make out as well as Reyes today.  Her case is still alive, though the appellate court sent her case back to the judge for re-sentencing.

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