New Derivative Case Against Brocade Directors Accuses Wilson Sonsini of Malpractice

Zusha Elinson

The Recorder

Few plaintiffs have gone after companies' outside lawyers in backdating lawsuits. But a new derivative case against directors and officers at Brocade Communications Systems Inc. also targets the company's law firm, Wilson Sonsini Goodrich & Rosati. Filed April 18 in Northern District federal court by a small San Diego firm, Johnson Bottini, the suit accuses Wilson Sonsini of legal malpractice for allegedly blessing backdating at Brocade, a company that saw two of its former executives convicted of criminal charges.

In particular, the plaintiff alleges that the firm signed off on a part-time program for new Brocade hires that was really set up to grant stock options for the new employees at low points. The complaint also claims that Wilson Sonsini gave bad legal advice on a settlement proposal that didn't give enough to Brocade in another derivative case.

Although firm Chairman Larry Sonsini has been named in backdating suits in his role as a director, as in this case with Brocade, the firm hasn't (aside from a case brought by a pro se Rambus investor).

"The obvious reason that people don't sue them is because they're going to have a lot of cases with Wilson Sonsini in the future," said Francis Bottini Jr., the lead lawyer on the case. "But if there's a valid claim, it's our duty as lawyers to bring them for the company."

A Wilson Sonsini spokeswoman said the firm had no comment on the case. Ralph Ferrara, a Dewey & LeBoeuf lawyer representing Brocade's special litigation committee, which will decide whether to pursue the derivative claims, did not return a phone call and e-mail seeking comment.

Securities lawyers say they're not surprised that outside law firms haven't been pulled into backdating derivative suits, which are filed by shareholders seeking to return value to the company for wrongdoing, usually by directors and officers.

"My belief is -- in the context of a shareholders' derivative action, and given the sophisticated relationship between outside counsel and the company -- that plaintiffs would have a hard time meeting several of the fundamental requirements of a derivative action [against an outside firm] and be successful," said Kenneth Philpot, a veteran defense-side securities litigator at Reed Smith in San Francisco.

First off, Philpot said, meeting "demand futility" -- the idea that only a court remedy will do -- would be difficult, since it would be hard to argue that a majority of the board was too conflicted to assess claims against an outside law firm and take action. Second, Philpot said, it would be hard to find evidence of law firms actually being involved with picking grant dates, a point that some plaintiff lawyers echoed.

"With outside lawyers, it would be a real question if they were involved in that detail," Philpot said.

Bottini said those aren't obstacles in this case. He said he thinks the reason that other plaintiffs firms haven't gone after law firms like Wilson is because they don't want to pay for it down the road when opposing the firm in securities cases.

"Are they going to try to retaliate against us? I don't know," Bottini said. "But Frank Bottini is probably not going to be their favorite person over at Wilson."

Bottini's firm is co-counsel in another Brocade derivative suit in state court. He said the firm decided to file the federal action when a plaintiff suggested that there were additional claims to pursue. (Another federal action had already been filed by other lawyers, but has stalled, Bottini said.)

The aggressive 162-page complaint includes RICO claims against a number of defendants as well as the new accusations against Wilson.

With regard to the proposed settlement of state and federal derivative cases at issue, the complaint says that Wilson helped craft a 2006 proposal that would've released everyone -- except convicted former CEO Gregory Reyes -- from liability in return for $525,000 in attorney fees and corporate therapeutics. It also would've released Wilson from any claims, according to the complaint. The proposal has yet to be approved.

"If they had negotiated a good settlement, things might've been a little different," Bottini said.

The complaint also says that before the proposed settlement, Wilson counseled Brocade to sell itself to Cisco to get rid of its backdating problems.

The plaintiff wants Wilson to pay Brocade restitution and disgorgement of fees.