Objection filed by NPR client leads to rejection of derivative settlement
April 27, 2007
Case Caption: In re Brocade Securities Litigation, Case No. 3:05-CV-02042, United States District Court for the Northern District of California (San Francisco)
In In re Brocade Securities Litigation, NPR serves as Class Counsel Counsel on behalf of the Lead Plaintiff and Class Representative, the Arkansas Public Employees Retirement System. This securities fraud case arose from conduct causing Brocade’s restatement of all of its financial statements over a five-year period.
In January 2006, after a vigorously contested lead plaintiff selection process, United States District Judge Charles Breyer appointed Nix, Patterson & Roach Lead Counsel, and firm client, the Arkansas Public Employees Retirement System (APERS), Lead Plaintiff, in the consolidated securities litigation pending against Brocade Communications Systems, Inc., in the United States District Court for the Northern District of California, San Francisco Division.
To view a copy of the Court’s Order appointing APERS Lead Plaintiff, click “view Lead Plaintiff Order” below.
On April 14, 2006, APERS filed a Consolidated Class Action Complaint against Defendants. The Complaint alleges that Defendants engaged in repeated violations of federal securities laws by backdating options grants to top executives and falsified the date of stock option grants and other information regard options grants to numerous employees from 2000 through 2004, which ultimately caused Brocade to restate all of its financial statements from 2000 through 2005.
On July 20, the Securities and Exchange Commission announced that it had filed a civil action against Brocade's former CEO, Greg Reyes, former CFO, Antonio Canova, and former Vice President of Human Resources, Stephanie Jensen for securities fraud.
To view a copy of the SEC Complaint, please click "view SEC Complaint" below.
That same day, the United States Department of Justice announced that it was filing a criminal complaint against Reyes and Jensen for securities fraud and other charges. On August 10, a federal Grand Jury handed down an Indictment against Reyes and Jensen.
To view a copy of the DOJ Criminal Complaint, please click "view DOJ Criminal Complaint" below.
NPR filed a Motion for Partial Modification of the PSLRA Discovery Stay on September 29, 2007.
On October 3, 2006, the Court held a hearing on Defendants' Motions to Dismiss and Lead Plaintiffs' Partial Modification of the PSLRA Discovery Stay, which NPR partners Brad Beckworth and Jeff Angelovich argued for Lead Plaintiff. At the conclusion of the hearing, the Court granted APERS' Motion for Partial Modification of the PSLRA Discovery Stay, ordering Brocade to produce to APERS all documents previously produced to federal regulators and Brocade's audit committee and special investigative counsel. This ruling marked one of the first times a plaintiff obtained such relief in a non-bankruptcy case.
To view a copy of the Motion to Modify the PSLRA Discovery Stay, please click "view Motion to Modify the PSLRA Discovery Stay" below.
The Court also denied the Motions to Dismiss filed by Brocade and its former CEO, Greg Reyes, and CFO, Antonio Canova. We believe this was the first time a class action complaint predicated on options backdating was sustained under the federal securities laws.
On January 2, 2007, APERS filed an amended complaint against former Brocade Audit Committee members Larry Sonsini, Seth Neiman, and Neal Dempsey. These defendants filed motions to dismiss and later argued that the Supreme Court’s decision in Tellabs was fatal to APERS’ claims.
To view a copy of the Amended Consolidated Complaint, please click “view Amended Consolidated Complaint” below.
On April 5, 2007, APERS and Puerto Rico Government Employees Retirement System filed an objection to a proposed settlement in the shareholder derivative litigation pending against nominal defendant Brocade and certain former officers and directors. The derivative litigation and proposed settlement does not involve any claims asserted by APERS or other shareholders for damages under the federal securities laws. However, it does affect the claims that Brocade itself may have against the individuals that participated in conduct related to Brocade's accounting errors and restatement of five years worth of financial statements.
The basis for the objection was that the proposed settlement is the result of a collusive settlement process in which the same law firm represented itself, the company, and its named partner, while, at the same time, negotiating a release of all claims Brocade may have against that firm and its named partner. The end result is that the proposed settlement leaves the company and its shareholders with no real relief, while, at the same time, it bars the company from taking action against many of the persons who may be responsible for the Brocade's improper accounting and requires Brocade to continue paying for their legal fees.
The Court held a hearing on this objection on April 27, 2007, which was argued by NPR partners Brad Beckworth and Jeff Angelovich. Prior to the hearing, the plaintiffs for the derivative case informed the Court that they no longer wished to seek final approval of the settlement and, instead, wanted to "wait and see" what other evidence came to light in the other related proceedings against Brocade and certain officers and directors. In light of the objections raised to this settlement, the Court determined that it would not approve the settlement.
To view a copy of APERS’ and PGERS’ Objection to the Derivative Settlement, please click “view Objection to Derivative Settlement” below.
To view a copy of the transcript of this hearing, please click “Transcript of Derivative Settlement Objection Hearing.”
On August 7, 2007, a federal jury convicted Greg Reyes on all ten counts on which he was indicted, including federal securities fraud for signing Brocade’s fraudulent SEC Form 10-Ks for 2001, 2002 and 2003.
The Court held a hearing on the Motions to Dismiss filed by former Brocade Board Members, Larry Sonsini, Neal Dempsey and Seth Neiman on August 24, 2007, which was argued by NPR partners Brad Beckworth and Jeff Angelovich. The Court denied these Defendants’ Motions on August 27, 2007. The Court accepted our argument that the viability of the allegation against these three Defendants was actually strengthened by the Supreme Court’s holding in Tellabs .
To view a copy of the Court’s Order, please click “Order Denying Director Defendants’ Motion to Dismiss” below.
On October 12, 2007, the Court held a hearing on APERS’ Motion for Class Certification, which was argued by NPR partners Brad Beckworth and Jeff Angelovich. After months of hotly contested briefing, the Court granted APERS Motion and certified a class consisting of all persons and entities who purchased or otherwise acquired the securities of Brocade between May 18, 2000 and May 15, 2005, inclusive, and who were damaged thereby. The Court appointed NPR as Class Counsel and APERS and the Erie County Public Employees Retirement Fund as Class Representatives.
That same day, the Court also heard argument on a Motion for Partial Summary Judgment filed by NPR on behalf of APERS. In this Motion, we argued that, as a result of Greg Reyes’ conviction, APERS and the Class were entitled to partial summary judgment against Reyes on the issues of falsity, scienter and materiality (three of the five elements of a securities fraud claim) under the doctrine of collateral estoppel. The Court granted our Motion as to the SEC Form 10-Ks signed by Reyes for Brocade’s fiscal years ended 2001, 2002 and 2003.
On December 5, 2007, a federal jury convicted Brocade’s former Vice President of Human Resources for conspiracy and falsifying books and records.
On January 16, 2008, United States District Judge Breyer sentenced Greg Reyes to 21 months in federal prison.
On January 18, 2008, APERS filed a Motion for Partial Summary Judgment against Defendant Brocade. In this Motion, APERS seeks judgment as a matter of law that Greg Reyes was acting in the course and scope of his employment at Brocade at the time he signed each of the false and misleading statements at issue in this litigation. Argument on this Motion is set for March 28, 2008.
We are currently conducting discovery in this case and preparing for trial.
For the following reasons, we believe this case is significant and representative of NPR’s commitment to maximizing shareholder and stakeholder recovery in securities fraud and corporate governance litigation:
- It is the first major case filed regarding “options backdating.” At the time we began prosecuting this case, the recent media headlines and outrage regarding options backdating had not yet begun. We were on the forefront.
- In an aggressive and virtually unprecedented move in a non-bankruptcy case, Lead Plaintiffs secured a ruling partially modifying the PSLRA discovery stay and ordering Brocade to produce all documents previously provided to federal regulators and Brocade's audit committee and special investigative counsel.
- Adopting our arguments in opposition to motions to dismiss, the Court issued one of the first opinions concluding that the United States Supreme Court’s holding in Tellabs, Inc. v. Makor Issues & Rights, Ltd. actually lowered the pleading standards under the PSLRA.
- Confirming our theory of the case, on August 7, 2007, a jury found Brocade’s former CEO, Greg Reyes, guilty on all counts of securities fraud. Similarly, on December 5, 2007, a second jury found another Brocade executive, Stephanie Jensen, guilty of securities fraud relating to her role in the backdating. Reyes has been sentenced to 21 months of federal incarceration. Jensen’s sentencing hearing is scheduled for March 19, 2008. Reyes and Jensen were the first in the United States to be charged in the stock options backdating investigation that has ensnared more than 170 U.S. companies.
- We objected to a proposed settlement in the Brocade shareholder derivative litigation. While the derivative action and proposed settlement did not involve any claims asserted by Lead Plaintiff or other shareholders for damages under the federal securities laws, the proposed settlement would have released all of Brocade’s claims against certain individuals that participated in conduct related to Brocade's accounting errors and restatement. Recognizing the inherent unfairness in the settlement, we filed an objection asserting that the proposed settlement was the result of a collusive settlement process in which Brocade’s law firm secured for itself and its managing partner a release of all claims Brocade may have against them related to their conduct in connection with the accounting errors and restatement. If approved, the proposed settlement would have left the company and its shareholders with no real relief, while, at the same time, barring the company from taking action against many of the persons who may be responsible for Brocade's improper accounting. In light of Lead Plaintiff’s objection, plaintiffs for the derivative shareholder class withdrew their request for final approval of the settlement.
- This case had been featured in stories by the Wall Street Journal, Bloomberg and New York Times. In 2007, an article referencing this litigation and NPR’s role in this case, received the Pulitzer Prize for Public Service Journalism. That article, Steve Stecklow, Setting the Date: How One Tech Company Played With the Timing of Stock Options, WALL ST. J, July 20, 2006, at A1, can be found at http://www.pulitzer.org/archives/7191.
To see the following case-specific documents, please click on the link below:
Brocade Communications Systems, Inc.