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In a news conference last week, San Francisco U.S. Attorney Kevin Ryan sounded unsure whether his new stock options task force would end up indicting any Silicon Valley executives. “We’re not saying this will necessarily lead to criminal prosecutions,” Ryan told the San Francisco Daily Journal. But defense lawyers involved in the investigations of options backdating, being conducted by federal prosecutors and securities regulators in New York and San Francisco, say Ryan was playing coy: At least one former Silicon Valley executive will likely be indicted imminently, possibly with more to follow. Indeed, on Thursday � the day of Ryan’s news conference � the lawyer for Gregory Reyes, the ex-CEO of Brocade Communications Inc., was in the San Francisco Federal Building trying to convince Ryan’s deputies not to indict his client. “I really can’t talk about it,” said Richard Marmaro, the L.A.-based Skadden, Arps, Slate, Meagher & Flom partner representing Reyes, when asked about the meeting Friday. Marmaro and other defense lawyers also said they couldn’t discuss a civil suit against Brocade board members � including top Silicon Valley corporate lawyer Larry Sonsini � that has recently come to a tentative settlement. Reyes is widely expected to be the first executive indicted in the backdating mess, which has become a rat’s nest of investigations stemming from a series of Wall Street Journal stories showing that companies backdated option grants in order to maximize payouts for executives.
Optional Reading

Read The Recorder‘s roundup of the stock-option backdating scandal. There won’t be a test later … but there might be a subpoena.

The reason for Brocade’s primacy, say defense lawyers, is that its options problems blew up long before backdating became a national scandal. Eumi Choi, Ryan’s top assistant and the head of his backdating group, didn’t return calls Friday. But according to SEC filings and defense lawyers, Ryan’s office � addition to the requisite armada of plaintiff lawyers � has been investigating Reyes for well over a year, since Brocade restated its earnings due to problematic options grants in early 2005. At the time, few, if any, prosecutors or plaintiff lawyers realized that their investigations into an apparently routine securities mess would end up as the first cases in what some call the biggest corporate scandal to hit Silicon Valley since the dot-com bust. But over the last week, defense lawyers have increasingly looked toward Brocade for hints of how subsequent civil and criminal cases will play out. On the criminal end, Marmaro has been to San Francisco repeatedly in attempts to convince prosecutors that his client’s actions don’t amount to criminal behavior. And while Marmaro wouldn’t discuss those talks, his client has been quite public about who he thinks is responsible for the company’s options problems: Sonsini. In February, Reyes told Business Week that Sonsini, of Wilson Sonsini Goodrich & Rosati and a former member of Brocade’s board, suggested a compensation structure in which Reyes sat as a “committee of one,” and thus could dole out stock options to executives at his will. When questions were raised about options grants, Reyes said, Sonsini argued for him to resign. In the flurry of civil cases that followed Brocade’s disclosure of backdating problems last year, Sonsini � due to his status as a member of the company’s board � ended up as a defendant in at least one case where his firm continued to represent the company. Over the last couple of weeks that case, a derivative action against the Brocade board, has come to a tentative resolution. In papers recently filed in San Francisco federal court, a group of plaintiff and defense lawyers outlined a settlement that would get rid of a claim that Brocade board members � including Sonsini � breached their fiduciary duty by allowing Reyes to misreport options grants. In exchange Brocade has agreed to reform board procedures. The settlement involves no money, although plaintiff lawyers expect to be awarded $525,000 in fees. Marmaro wouldn’t comment on why Reyes was left out of the settlement. Sonsini didn’t return a call asking about the case. One of the plaintiff attorneys in the derivative suit, William Federman of Federman & Sherwood in Oklahoma City, said the settlement covers only a small portion of shareholder claims against Brocade � there are still other derivative suits touching on different issues, as well as securities class actions. In his case, Federman said Sonsini’s status as both a defendant and the chairman of the firm defending Brocade board members didn’t raise significant conflict questions. “He’s not technically a lawyer. His firm is,” Federman said.

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