Source: s3://data.kl3m.ai/documents/govinfo/USCOURTS/USCOURTS-cand-3_05-cv-02042/USCOURTS-cand-3_05-cv-02042-23/pdf.json

Nature of Suit Code: 850
Nature of Suit: Securities, Commodities, Exchange
Cause of Action: 15:78m(a) Securities Exchange Act

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United States District Court

For the Northern District of California

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United States District Court

For the Northern District of California

IN THE UNITED STATES DISTRICT COURT

FOR THE NORTHERN DISTRICT OF CALIFORNIA

PRENA SMAJLAJ, individually and on

behalf of others similarly situated,

Plaintiff,

 v.

BROCADE COMMUNICATIONS

SYSTEMS INC., et al,

Defendants. /

No. C 05-02042 CRB

CLASS ACTION

ORDER DENYING MOTION TO

DISMISS AS TO DEFENDANTS

DEMPSEY, NIEMAN, AND SONSINI

In this securities class action, Plaintiffs contend that certain directors, officers and

employees at Brocade Communications Systems, Inc., concocted a scheme to backdate stock

options and thereby avoided recording certain non-cash compensation expenses. Now

pending before the Court is a motion to dismiss filed by Defendant Neal Dempsey,

Defendant Seth Neiman, and Defendant Larry Sonsini. 

The question presented is whether Plaintiffs’ amended complaint contains allegations

sufficient to sustain a cause of action against these three defendants under the Private

Securities Litigation Reform Act, Pub. L. No. 104-67, 109 Stat. 737 (1995). Specifically,

Defendants contend that the complaint fails to “state with particularity facts giving rise to a

strong inference that the defendant acted with the required state of mind.” 15 U.S.C. § 

78u-4(b)(2).

Case 3:05-cv-02042-CRB Document 344 Filed 08/27/07 Page 1 of 3
United States District Court

For the Northern District of California

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1 On the flip side, Defendants’ respective request for judicial notice provides little support

for its motion to dismiss. The fact that the Securities and Exchange Commission has not filed

civil charges against Dempsey, Nieman, and Sonsini may suggest something about the strength

of the evidence on which Plaintiffs plan to rely. But it says nothing about the strength of

Plaintiffs’ allegations, which are presumed true on a motion to dismiss under Rule 12(b)(6).

Likewise, the fact that certain filings were made with the SEC offers scant support for a motion

to dismiss when the theory of the complaint is that Defendants concealed the nature of their

backdating scheme from shareholders and the SEC alike.

2

To survive a motion to dismiss, Plaintiffs “must plead, in great detail, facts that

constitute strong circumstantial evidence of deliberately reckless or conscious misconduct.” 

In re Silicon Graphics Inc. Sec. Litig., 183 F.3d 970, 974 (9th Cir. 1999). Plaintiffs need not

present an allegation of “the smoking gun genre,” nor must the inference necessarily be the

“most plausible” of all competing inferences. Tellabs, Inc. v. Makor Issues & Rights, Ltd.,

127 S.Ct. 2499, 2510 (2007). Rather, as the Supreme Court recently explained, the alleged

facts must give rise to an inference of scienter that is “cogent” and “compelling,” in other

words “at least as compelling as any opposing inference one could draw from the facts

alleged.” Id. In considering the strength of the inference established by the allegations, a

district court cannot consider allegations “in a vacuum,” but instead must “consider the

complaint in its entirety, as well as other sources courts ordinarily examine when ruling on

Rule 12(b)(6) motions to dismiss, in particular, documents incorporated into the complaint by

reference, and matters of which a court may take judicial notice.” Id. at 2509.

The Court concludes that Plaintiffs have satisfied their burden. In reaching this

conclusion, the Court has relied upon none of the materials contained in Plaintiffs’ request

for judicial notice. Rather, the Court believes that there are allegations sufficient to support a

“strong inference of scienter” within the four corners of Plaintiffs’ complaint.1

 In contrast to

the original consolidated complaint, which contained little more than a blanket assertion that

the members of the Audit Committee did not do their job well, see Compl. ¶¶ 175-85, the

amended complaint contains page upon page of detail about the specific tasks delegated to

and responsibilities assumed by the three moving Defendants; their respective roles in the

company’s decision to place nearly exclusive authority over certain aspects of the stock

options program in the hands of Brocade’s CEO; as to Nieman and Dempsey, the size and

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United States District Court

For the Northern District of California

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G:\CRBALL\2005\2042\order re mtd.wpd 3

timing of the specific stock option grants they approved; and in the case of Sonsini, his

connection to myriad other companies where stock options practices of an apparently similar

nature have surfaced, see Am. Compl. ¶¶ 15, 39-40, 170-217 (Dempsey and Nieman), id. ¶¶

16-17, 218-236 (Sonsini). 

Not without good reason, Defendants have repeatedly invoked this Court’s warning

about the need “to be careful that we don’t just slip over from approving the backdated

options to approving the options which they knew were backdated.” Motion at 14 (citing

Mot. to Dismiss Hr’g Tr. 18:9-25, Nov. 3, 2006). The additional, detailed allegations

furnished by the amended complaint give rise to an inference, at least as strong as any other,

that Brocade was issuing backdated stock options, and that Dempsey, Nieman, and Sonsini

either knew, or were reckless in not knowing, about the retroactive pricing. For this reason,

their motion to dismiss must be, and hereby is, DENIED.

IT IS SO ORDERED.

Dated: August 27, 2007 

CHARLES R. BREYER

UNITED STATES DISTRICT JUDGE

Case 3:05-cv-02042-CRB Document 344 Filed 08/27/07 Page 3 of 3