$160 Million Added to Brocade's Backdating Bill

Brocade Communications agreed Monday to fork over a record $160 million to settle a civil backdating class action, but Larry Sonsini isn't quite in the clear. The deal releases the former Brocade director and outside counsel at Wilson Sonsini from liability in the securities class action, but a derivative suit once close to settlement lives on, and now, a Brocade special litigation committee spawned by the suit could recommend claims against the company's former executives -- and its professional advisers.

Dan Levine

The Recorder

2008-06-03 12:00:00 AM

Though Brocade Communications agreed on Monday to fork over a record $160 million to settle a civil backdating class action, Larry Sonsini isn't quite in the clear.

The company-funded deal releases Sonsini, former Brocade director and outside counsel at Wilson Sonsini Goodrich Rosati, from liability in the securities class action. But a derivative suit that had once been close to settlement lives on, and now, a Brocade special litigation committee spawned by that lawsuit could recommend claims against the company's former executives -- and its professional advisers.

While the litigation committee has not yet decided whether there are meritorious claims, it will take into account any settlements the company has had to pay in its damages analysis, according to a letter filed in court last month by Dewey & LeBoeuf, which represents the committee.

The $160 million class action deal represents the largest payout seen in the backdating mess so far.

"Brocade believes that this settlement is in the best interest of its shareholders and the company as it significantly reduces the uncertainty associated with this ongoing litigation," the company said in a securities filing.

The case had been in mediation for a year and a half with Layn Phillips, a former federal judge now at Irell & Manella, said Bradley Beckworth, lead plaintiffs counsel at Nix, Patterson & Roach in Texas. Cooley Godward Kronish partner John Dwyer litigated the matter for Brocade after longtime company counsel Wilson Sonsini stepped aside last year.

"I have the utmost respect for Cooley," Beckworth said. "They did a fantastic job litigating when they took over, working with us to get to a hard-fought, difficult-to-reach resolution."

The derivative case had been close to a settlement last year that would have released Wilson Sonsini from any claims asserted by Brocade, according to court filings. But a group of plaintiffs lawyers from the 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 Judge Charles Breyer expressed concerns about the potential conflict, Wilson withdrew from representing Brocade in both the derivative and the securities class action.

But by 2008, the proposed derivative settlement had stalled. "It became apparent at the February settlement conference that a global resolution of the derivative litigations adequately protecting the interests of the company was not possible," the company and plaintiffs lawyers said in a stipulated filing.

That's when Brocade's board formed the special litigation committee, made up of two members who had not been at the company when the backdating occurred. Dewey lawyers have since been meeting with attorneys at Wilson, Cooley and Morrison & Foerster, which did its own internal investigation of backdating at the company.

Brocade was one of the first companies to be ensnared in the backdating scandal as it restated $303 million. Two of its former executives have received prison sentences for their roles. Prior to Brocade, the biggest backdating settlement involved HP's agreement to pay $117 million on behalf of Mercury Interactive, which it acquired.