Wilson Sonsini Goodrich & Rosati has paid $9.5 million to Brocade Communications Systems to release itself -- as well its chairman and former Brocade board member, Larry Sonsini -- from civil claims stemming from the backdating disaster at the firm's longtime client.
News of Wilson's payment was tucked into a footnote in court filings Friday connected to the effort by Brocade's special litigation committee to recover some of the approximately $830 million it alleges the scandal has cost the company in settlements, legal fees and a missed merger opportunity with Cisco Systems Inc.
The special litigation committee, represented by Dewey & LeBeouf's Ralph Ferrara, filed suit against 10 former executives and board members late Friday, accusing them of racketeering, securities violations and breach of fiduciary duties. Criminally convicted CEO Gregory Reyes and HR chief Stephanie Jensen are named along with other defendants in the 282-page complaint. The new lawsuit will take the place of pending derivative suits if Brocade wins motions to dismiss them.
Wilson Sonsini was Brocade's outside counsel and Larry Sonsini sat on the company's board when Brocade backdated stock options. Both were named in a federal derivative suit filed by San Diego plaintiffs firm Johnson Bottini in April.
In moving to dismiss that derivative suit, the committee detailed its reasons for letting Sonsini and his firm off the hook. The committee wrote that it weighed the opinion of a legal ethics expert as well as testimony and documents related to Sonsini and the firm's roles at Brocade. It also listened to Sonsini and his firm's "contentions that Brocade employees misled WSGR about stock-option grants" and that the firm had negotiated a good settlement with the SEC and helped avoid DOJ action against Brocade. The committee also considered the firm's longstanding relationship with Brocade and the firm's "willingness" to help the company resolve any "outstanding questions" about the backdating.
Wilson's money was a factor, too: "WSGR's commitment to pay (and its subsequent payment of) a one-time contribution in the amount of $9.5 million in recognition of and in order to defray some of the significant costs Brocade has incurred over the past four years in connection with the various investigations and lawsuits relating to the Company's historical stock option practices."
The footnote concludes: "After balancing the full array of considerations, the SLC has determined that pursuing claims against WSGR and Mr. Sonsini would be inappropriate."
Wilson Sonsini spokeswoman Courtney Dorman refused to characterize the payment as a settlement but conceded that it came as part of the "SLC's process."
"Brocade continues to be an important, longstanding client, and we're glad that this is resolved," Dorman said Monday.
Brocade spokesman John Noh said Brocade "continues to have full confidence in Wilson Sonsini Goodrich & Rosati as its outside counsel, and we look forward to continuing that relationship."
Evan Chesler, the Cravath Swaine & Moore partner who represents Sonsini and his firm, did not return a call seeking comment.
Frank Bottini, lead lawyer on the federal derivative suit, called the settlement "woefully inadequate" but "better than nothing."
Securities lawyers said they were surprised by Wilson's settlement and the size of the payment.
"It's not an insignificant number," said Kenneth Philpot, a veteran securities litigator at Reed Smith in San Francisco.
The derivative case had been close to a settlement last year that would have released Wilson Sonsini from any claims asserted by Brocade without any payment, according to court filings. But a group of plaintiffs lawyers from a securities class action objected.
"Buried in the fine print is a conflict like no other: While acting as counsel for nominal defendant Brocade, WSGR also acted as counsel for itself," they stated in a court filing.
When U.S. District Judge Charles Breyer expressed concerns about the potential conflict, Wilson withdrew from representing Brocade in both the derivative and the securities class action.
Dewey & LeBeouf will now represent Brocade instead of Cooley Godward Kronish, which had taken over the case from Wilson Sonsini.
Bottini said that while the Dewey lawyers could've done more, they did better than Cooley.
"I'm happy to see the SLC is pursuing some of the claims that were made in my federal case," Bottini said. "Obviously I am disappointed that they're not pursuing all defendants and claims in my case, but it's certainly a lot more than what Cooley Godward was proposing to do when they were in the case."
Lawyers from Cooley Godward and Dewey & LeBeouf declined to comment.
Although special litigation committees have gone after executives for backdating, pursuing some claims from shareholder derivative suits, none has gone after so many as in the Brocade case. Reed Smith's Philpot said that's probably because of the nature of the Brocade case, which saw criminal convictions and expensive settlements.
"It would seem to me they must have determined a factual background and factual predicate for their recommendation, and finding that would be really a different kind and degree than most of the other cases," Philpot said.
The voluminous complaint details what the backdating scandal cost Brocade, including $160 million to settle the securities class action, and $7 million to settle SEC charges. The company spent about $7.5 million on its two internal investigations and another $67 million defending Reyes, Jensen and other former executives and $30 million defending itself.
The complaint also said Brocade lost $470 million when the backdating scandal dashed a proposed merger with Cisco.
Lawyers for the former executives and others named in the SLC's suit either declined to comment or said they would fight the new lawsuit.
