In re Brocade Communications Systems, Inc.
| Decision Date | 06 January 2009 |
| Docket Number | No. C 05-02233 CRB.,C 05-02233 CRB. |
| Citation | 615 F.Supp.2d 1018 |
| Court | U.S. District Court — Northern District of California |
| Parties | In re BROCADE COMMUNICATIONS SYSTEMS, INC. DERIVATIVE LITIGATION. This document relates to ALL ACTIONS. |
Barbara A. Caulfield, Dewey & Leboeuf LLP, East Palo Alto, CA, Ann M. Ashton, Jonathan E. Richman, Lyle Roberts, Ralph C. Ferrara, Dewey & Leboeuf LLP, Washington, DC, Peter Edward Root, Dewey & Leboeuf LLP, East Palo Alto, CA, for Brocade Communications Systems, Inc.
Jack Patrick Dicanio, Richard Marmaro, Skadden Arps Slate Meagher & Flom LLP, Navid Yadegar, Proskauer Rose LLP, Los Angeles, CA, Garrett J. Waltzer, Skadden Arps Slate Meagher & Flom, LLP, Palo Alto, CA, for Gregory L. Reyes.
Norman J. Blears, Robin Eve Wechkin, Hogan & Hartson LLP, Palo Alto, CA, Colin Eugene Kelley, Heller Ehrman LLP, San Francisco, CA, Matthew C. Holohan, Heller Ehrman LLP, Menlo Park, CA, for Antonio Canova.
Jeffrey B. Rudman, Wilmer Cutler Pickering Hale & Dorr, Boston, MA, Jonathan Acker Shapiro, Wilmer Cutler Pickering Hale and Dorr LLP, Michael A. Mugmon, Wilmerhale LLP, Palo Alto, CA, for Seth D. Neiman.
Jeffrey L. Bornstein, Leah Gabriana Shough, Ramiz I. Rafeedie, K&L Gates LLP, San Francisco, CA, for Neal Dempsey.
Stephen D. Hibbard, Shearman & Sterling LLP, San Francisco, CA, for Christopher B. Paisley, David L. House, Nicholas G. Moore, L. William Krause, Sanjay Vaswani, Robert R. Walker, Michael Klayko.
Jan Nielsen Little, Michael D. Celio, Steven Paul Ragland, Keker & Van Nest, LLP, San Francisco, CA, for Stephanie Jensen.
John Mark Potter, Josh Alan Cohen, Patrick C. Doolittle, Quinn Emanuel Urquhart Oliver & Hedges LLP, San Francisco, CA, for Michael J. Byrd.
Douglas R. Young, Jessica Koren Nall, Farella Braun & Martel LLP, San Francisco, CA, for Mark Leslie.
Robert Charles Friese, Jahan Pierre Raissi, Jason Pang Fe Lee, Shartsis Friese & Ginsburg LLP, San Francisco, CA, for Paul R. Bonderson, Jr.
Michael David Torpey, Amy M. Ross, Justyna Maria Walukiewicz, Stephen Michael Knaster, Walter F. Brown, Orrick Herrington & Sutcliffe LLP, Ruth Young
Kwon, Attorney at Law, San Francisco, CA, Anthony Angelo De Corso, Eric A. Gressler, Mark E. Beck, Orrick, Herrington, & Sutcliffe LLP, Los Angeles, CA, for Jack Cuthbert, Robert D. Bossi.
ORDER ON MOTIONS TO DISMISS
This matter began as a shareholders' derivative action brought on behalf of Brocade Communications Systems, Inc. ("Brocade" or the "Company") against certain of its former officers and directors. Defendants were allegedly involved in a scheme to manipulate stock option grant dates so as to maximize profits to themselves at the expense of the Company. The original shareholder plaintiffs asserted violations of state law, including breaches of fiduciary duties and unjust enrichment. See Verified Derivative Complaint ¶ 1 ("VDC"); Docket Entry ("Dkt.") 1. The Court dismissed the original complaint with leave to amend because no demand was made on the Company. See Dkt. 79. After prolonged negotiations, the Company formed a Special Litigation Committee ("SLC"), which decided to take over litigation and pursue this matter on Brocade's behalf. On August 1, 2008, Brocade filed a Second Amended Complaint ("SAC"). See Dkt. 220. The SAC named as defendants individuals who were not previously part of the derivative action and asserted additional claims under federal securities law.
Presently before the Court are motions to dismiss filed by all Defendants. The Court conducted a hearing on December 5, 2008. At that hearing the Court assured the parties that it would issue an order the following week. As promised, on December 12, 2008, the Court issued a memorandum order, granting in part and denying in part Defendants' Motions to Dismiss. See Dec. 12, 2008 Order, Dkt. 375. The instant opinion provides the full rationale upon which that order was based.
In the Second Amended Complaint, Brocade alleges the following:
1. The Parties
Plaintiff Brocade was originally incorporated in California in 1995, and later reincorporated in Delaware in 1999. SAC ¶ 10. The Company is a supplier of storage area network equipment and provides data center networking solutions. Id.
Defendant Gregory L. Reyes was Brocade's Chief Executive Officer ("CEO") from July 1998 until January 2005, and served on the Board of Directors from July 1998 through April 2005. SAC ¶ 11. Reyes devised a scheme whereby he granted faulted stock options to employees, routinely approving grants as a "committee of one" for Brocade's Board. Id. As a Board member, Reyes was involved in stock-option grants to officers and directors, including himself. Id. Reyes also signed financial statements that later needed to be restated because they incorrectly reported Brocade's compensation-related expenses. Id.
Defendant Stephanie Jensen served as Brocade's Vice President of Human Resources ("HR") from October 1999 until February 2004. SAC ¶ 12. Jensen was responsible for Brocade's compensation and benefits programs, including stock options. Jensen knowingly participated in the granting of faulted stock options and altered Brocade's records. Id. Jensen herself received a large number of faulted stock options. Id.
Defendant Michael J. Byrd was Brocade's Vice President and Chief Financial Officer ("CFO") from May 1999 until May 2001. SAC ¶ 13. Byrd then served as Brocade's Chief Operating Officer ("COO") and President from June 2001 until June 2003. Id. Byrd knowingly participated in the faulted stock-option grant process, signed inaccurate financial statements, and received faulted options. Id.
Defendant Antonio Canova was Brocade's Vice President of Finance from November 2000 until November 2004, Vice President of Administration from November 2004 until December 2005, and CFO from May 2001 until December 2005. SAC ¶ 14. Canova was aware of and involved in the granting of faulted stock options. Id. Canova signed inaccurate financial statements and received faulted options. Id.
Defendant Neal Dempsey was on Brocade's Board of Directors from December 1996 until April 2007. SAC ¶ 15. Dempsey was a member of the Board's Audit Committee from February 1998 through October 2004, and on the Compensation Committee from February 1998 through February 2007. Id.
Defendant Mark Leslie served on Brocade's Board from January 1999 until May 2002. SAC ¶ 16. Leslie was a member of the Audit Committee from June 2001 until May 2002 and a member of the Compensation Committee from March 1999 until August 2001. Id.
Defendant Seth D. Neiman was one of Brocade's founders and served on the Board of Directors from August 1995 until April 2006. SAC ¶ 17. Neiman served on the Audit Committee from February 1998 until October 2001, and on the Compensation Committee from August 2001 until October 2004. Id.
As members of the Compensation Committee, Defendants Dempsey, Leslie, and Neiman were involved in granting stock options to officers and directors and in ratifying grants to employees. SAC ¶¶ 15-17. All were aware of the improper option-granting practices at Brocade and signed inaccurate financial statements. Id. These Defendants also received faulted options. Id.
Defendant Paul R. Bonderson, Jr. was one of Brocade's founders. SAC ¶ 18. Bonderson served as Brocade's Vice President of Engineering from August 1995 until November 2001, as Vice President of Strategic Development from November 2001 until January 2003, and as Chief Technology Officer and Chief Engineer from April 2003 until early 2005. Id. Bonderson was involved in the granting and pricing of stock options and was aware of the Company's improper practices. Id. He also received faulted options. Id.
Defendant Robert D. Bossi was Brocade's Controller from May 1999 until June 2003. SAC ¶ 19. Bossi participated in administrative and reporting functions in connection with the improper grant of stock options. Id. Bossi received faulted options. Id.
Defendant Jack Cuthbert served Brocade as an executive specializing in sales from 1998 until 2004. SAC ¶ 20. Cuthbert was aware of the improper practices at the Company and received faulted options. Id.
2. The Backdating Scheme
Facing an increasingly competitive market for the top technological talent, Brocade used stock options as a form of compensation in order to attract high-caliber employees. SAC ¶ 33. Reyes, in concert with Jensen, routinely provided extra compensation to employees (including themselves) that were backdated to coincide with low closing prices of Brocade's stock. SAC ¶ 58. This practice was contrary to the Company's stock-option plans, which required it to grant stock options with exercise prices based on the stock's fair market value on the actual grant date. SAC ¶ 56. Defendants knew that they were not adhering to the option plans SAC ¶ 57, and actively manipulated the timing and exercise of stock-option grants, SAC ¶ 58. Defendants falsified the dates of stock-option grants, forged records relating to Board proceedings, and created sham programs to lower the exercise prices of stock-option grants or to change the vesting periods. SAC ¶ 59. Defendants sought to avoid recording the compensation expenses on the Company's financial statements. SAC ¶¶ 54, 57, 58.
To implement this scheme, Reyes abused the authority purportedly given to him to grant stock options as a "committee of one." SAC ¶ 60. Reyes granted in-the-money options based on falsified documentation suggesting that the options has been granted on an earlier date, when the stock's market price was lower. Id. At the direction of Reyes, Jensen prepared documentation of...
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