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Attorneys are describing as a setback for plaintiffs a recent Delaware Court of Chancery’s dismissal of a stockholder’s breach of fiduciary duty case claiming that Sycamore Networks Inc. executives and directors used improper backdating practices on stock options. The decision means that plaintiffs must clearly illustrate directors’ culpability in order for them to file a lawsuit before asking the board to investigate options problems. Besides the breach claim, the derivative case brought by a stockholder on behalf of Sycamore also included an unjust-enrichment claim against the officers, and gross-mismanagement and unjust-enrichment claims against both directors and officers. The plaintiff shareholder John S. Desimone likened to concealed bonuses an April 2001 grant of options to some officers 16 days before a positive announcement because the company had access to nonpublic information likely to increase its stock price. John S. Desimone v. Timothy A. Barrows, No. 2210-N (New Castle Co., Del., Ch.) The company is in the midst of U.S. Securities and Exchange Commission and U.S. Department of Justice investigations for its backdating practices. It also has conducted its own investigations and is restating its financials from 2000 to 2007 to add noncash stock option expenses. A ‘high threshold’ The recent decision clarifies the rules for derivative-options lawsuits and the level of specificity required for plaintiffs’ claims, said Jim Carroll, a Boston partner with New York’s Skadden, Arps, Slate, Meagher & Flom, who represented Chelmsford, Mass.-based optical switch maker Sycamore and various individual defendants in the case. “It makes it clear that you have a high threshold to meet,” Carroll said. Desimone’s attorney Pamela S. Tikellis, a Delaware partner at Haverford, Pa.-based class action firm Chimicles & Tikellis, declined to discuss the opinion. In his decision, Vice Chancellor Leo E. Strine Jr. faulted Desimone’s complaint for its dearth of facts and lack of proof about board members’ knowledge. “Desimone rushed into court, making generalized charges of wrongdoing unaccompanied by fact pleading about the involvement of the directors in the improprieties he contends occurred,” Strine wrote. Other jurisdictions and federal courts have recently dismissed similar cases, but the Sycamore case is important because Delaware is a bellwether jurisdiction for corporate law.

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