Brocade Communications has agreed to pay investors $160 million to resolve a class-action lawsuit arising from allegations that already have led to a criminal conviction of former chief executive Gregory Reyes. The Brocade settlement – arising out of the stock-options backdating scandal – is the largest to date among dozens of cases filed in the nationwide scandal over rigged stock-option compensation. Several of these scandals involved Silicon Valley firms. This is one of the top recoveries in terms of ratio of settlement to damages sought by aggrieved investors that I am aware of. Arkansas Public Employees Retirement System was the lead plaintiff in this case.

A San Francisco federal court ruled in May that Brocade, a San Jose-based maker of networking hardware, was legally responsible for Reyes’ conduct and would have to pay damages. The settlement is subject to court approval. The Brocade case has been closely watched in Silicon Valley, in part because of the high-profile personalities involved in the case. As we previously reported, Reyes was sentenced in January to 21 months in prison and fined $15 million for his role in hundreds of instances of backdating. In March, Brocade’s former human resources chief, Stephanie Jensen, was sentenced to four months in prison and ordered to pay a $1.25 million fine for her role.

Since most securities fraud class action suits settle for less than 10% of investor losses, this $160 million settlement was a great one. It’s certainly one of the largest – if not the largest – backdating settlements to date. The fact that it’s close to a 100-percent recovery of the class’s total damages makes it most significant. The Brocade case was emblematic of a national scandal involving scores of companies that were found to have improperly manipulated the value of options, but failed to disclose their actions. Options provide recipients with the right to buy a share of stock at a set price, typically the closing share price on the date a grant is made. Brad Beckworth, a Texas lawyer, represented the lead plaintiff in this case and did a super job.

Source: Mercury News

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