July 30, 2006
A Counselor Pulled From the Shadows
By GARY RIVLIN, NY TIMES

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LARRY W. SONSINI, Silicon Valley’s most feared and sought-after lawyer, dresses in fine Italian suits even as the rest of the Valley — other high-priced attorneys included — ply their trades in chinos and blue Oxford shirts. He is soft-spoken and restrained, sometimes eerily quiet, in contrast to the brash and kinetic entrepreneurs and financiers who otherwise dominate the landscape.

While the Valley can be a chummy, clubby place where even adversaries freely trade tales of children and outside activities, Mr. Sonsini would no sooner share personal information about himself, a longtime legal rival said, than a soldier at war would fraternize with an enemy combatant. In a land in which even the top executives and most successful venture capitalists generally use verbal mallets to drive home a point, he is a surgeon, adroit at using an intellectual and legal scalpel to win an argument or get his way.

Silence, in Mr. Sonsini’s case, has been golden. During his 40 years as a lawyer, Mr. Sonsini, 65, has served as legal counsel to the most prestigious venture capital firms in Silicon Valley. He helped to bring public many of the leaders of the technology boom, including Netscape Communications, Pixar, Google, Apple and Sun Microsystems. The investment banking firm of Robertson Stevens, based in San Francisco until it closed its doors in 2002, handled more than 500 initial public offerings over a 30-year period, and Mr. Sonsini was there for most of them.

“In one way or another, Larry was involved in almost every deal we underwrote,” said Sanford R. Robertson, founder of the bank that bore his name. Mr. Sonsini, who briefly served on the board of the New York Stock Exchange, is not just the area’s most influential lawyer, Mr. Robertson said, “He’s probably the most powerful person in Silicon Valley.”

Powerful, but discreet. Powerful, but rarely center stage. While Mr. Sonsini is hardly a shrinking violet, he cultivates the image of Silicon Valley’s most ubiquitous supporting player, often preferring to say his lines behind the scenes. “It’s not my job to be in the newspapers,” he said in a telephone interview Wednesday. “I think my clients like me to be a trusted adviser with a high degree of integrity and stay out of the limelight.”

BUT many of Mr. Sonsini’s clients are currently in the limelight because of a growing scandal involving possible improprieties or illegalities relating to the backdating of lucrative stock options. Mr. Sonsini and his firm, Wilson Sonsini Goodrich & Rosati, based in Palo Alto, Calif., represents or represented “just under 50 percent” of Silicon Valley companies implicated in the scandal, according to a spokeswoman for the firm. That representation included offering advice on corporate governance issues like the proper handling of stock options.

Mr. Sonsini has not been accused of any wrongdoing in the scandal, nor is it even clear that he will be swept up in the investigation of questionable options policies that his clients adopted. But at least one former client that federal prosecutors have charged with criminal wrongdoing, the chief executive of Brocade Communications Systems, noted earlier this year that Mr. Sonsini advised the company on its stock options policies. The executive, Gregory L. Reyes, has declined to comment more recently; Brocade’s attorney described Mr. Sonsini as a “giant” and “brilliant lawyer.”

Mr. Sonsini declined to comment about Brocade and said that he was also “a little reluctant” to discuss the options investigation more broadly. “Not because I’m defensive, but because we represent a number of companies involved and it’s not appropriate for me to get out ahead and comment on things,” he said.

Even so, this man who has stuck mainly to the shadows now finds that the regulatory and prosecutorial spotlight aimed at his clients is casting a glare on his own actions. And Silicon Valley’s technorati are suddenly chattering about Mr. Sonsini, the éminence grise of high tech, with a frequency usually reserved for Google, the precinct’s venture capitalists or its hottest start-ups.

Those who have worked with Mr. Sonsini, including several rival attorneys who have sat across the table from him in negotiations, generally describe him as a wise man with a strong moral compass.

“You can hear rumors, and people talk, but his reputation has been durable in the more than 20 years since I’ve been here,” said Bill Campbell, the chairman of Intuit, the business software company and one of Mr. Sonsini’s longtime clients.

Robert V. Gunderson Jr., a founding partner at Gunderson Dettmer, another prominent Valley firm, stated: “Larry is a fierce but honorable competitor.”

Despite the hubris that permeated Silicon Valley during the tech boom of the mid- to late 1990’s, most companies there managed to avoid the public fates that later turned Enron, WorldCom and Tyco International into shorthand for corporate greed. But now Silicon Valley is emerging as the center of gravity for this latest inquiry into corporate abuse. Federal investigators are examining the extent to which top executives fudged dates — and then hid the fact that they did so — so that stock options they granted themselves and their employees would provide a bigger financial windfall when they chose to cash them in.

And one man at the center of it all is Larry Sonsini.

Mr. Sonsini’s firm provided legal counsel on corporate governance issues like the proper handling of stock options to roughly a dozen of the 25 Silicon Valley area companies implicated so far in the widening probe. Those 25 companies are either under federal investigation or have announced their own internal reviews.

FEDERAL prosecutors filed criminal charges against two former executives of Brocade Communications, a data storage equipment maker based in Silicon Valley, 10 days ago, claiming that the two officers backdated options. Wilson Sonsini served as outside counsel to Brocade and Larry Sonsini himself was a member of Brocade’s board and sat on the compensation committee until stepping down from the board last year.

Prosecutors have accused Brocade’s former chief executive, Mr. Reyes, of defrauding not only investors but also its board by doctoring documents, including board minutes. Mr. Reyes, through his attorney, Richard Marmaro, denied any wrongdoing, dismissing as clerical errors any alleged forgeries. But prosecutors, questioned at a news conference, said that they had not ruled out the possibility that Mr. Sonsini could be charged at a later date. In February, Mr. Reyes told BusinessWeek that Mr. Sonsini encouraged him in 1999 to assume sole authority to award Brocade options through the creation of a so-called committee-of-one.

Mr. Sonsini did not deny Mr. Reyes’s contention so much as muddy the waters. “I’m not so sure the committee-of-one didn’t exist before becoming counsel to Brocade,” he said.

Committees-of-one are typically established in intensely competitive job markets like the one the Valley presented in the late 1990’s, where speed and oversize compensation packages were essential to recruit top people. They are legal, but they can also place public companies on dangerous ethical ground because of the potential for abuse.

One member of the Valley’s legal profession, who requested anonymity because he sees Mr. Sonsini regularly and said he wanted to maintain good relations with him, said that he also had helped Valley companies create committees-of-one. But once you confer that much power on a single individual, he said, “you better watch what the guy does.”

When read that quote, Mr. Sonsini said that “you should not assume that those issues were not addressed,” suggesting that he was monitoring Mr. Reyes but could not possibly have known that the executive might have been forging dates and documents.

It is not clear what role, if any, Mr. Sonsini and other lawyers at his firm played in the legal woes of some of their clients, but over the last several years, the S.E.C. has aggressively pursued penalties against lawyers who give clients bad advice.

“It’s a frontier area right now,” said Alan R. Bromberg, professor of law at Southern Methodist University in Dallas. “The S.E.C. is pushing toward holding lawyers responsible even if they give bad advice, rather than fraudulent advice.”

But Mr. Bromberg also said that serving as outside counsel to a company while sitting on the company’s board was not usually a problem. “It’s essentially a disclosure issue,” he said. “You need to make sure that everybody that is involved in the decision-making process is aware of the two hats an individual is wearing.”

Just as it would be difficult to exaggerate the breadth of Mr. Sonsini’s reach across Silicon Valley, it would be hard to overstate his influence inside his own firm. Mr. Sonsini dominates Wilson Sonsini as few lawyers ever dominate a firm.

Allen Morgan, a former Wilson Sonsini partner who worked there between 1982 and 1997 (he is now a prominent Valley venture capitalist), estimated that Mr. Sonsini’s own practice was at least three to four times as large as that of the firm’s next closest partner — an estimate that Mr. Sonsini did not dispute. For nearly three decades, Mr. Sonsini served as the firm’s chief executive, until ceding the post to a younger partner last year. He is still the firm’s chairman.

“He’s like the Hollywood lawyers,” said Ron Conway, a prominent Silicon Valley angel investor who has known Mr. Sonsini 25 years. “He acts like a counselor and a consigliere. He’s the deal maker and the deal arranger.”

When Carleton S. Fiorina, former chief executive of Hewlett-Packard, came under attack by her board in 2001 after she announced plans to purchase Compaq Computer for $25 billion, she relied heavily on Mr. Sonsini to help her counter opposition to the deal. He has also advised Steven P. Jobs of Apple and Scott McNealy of Sun Microsystems, among others.

Clients say that they can phone Mr. Sonsini at 11:30 at night, and say they are equally certain he would make himself available at 5 in the morning. Like a legal Zelig, he has been present at many critical moments in the Valley’s history, though his central role in those events usually surfaces only after corporate or legal documents are filed or when tongues begin wagging over a few glasses of fine California cabernet.

“Larry has the ability to make C.E.O.’s feel like they are his only clients,” said Craig W. Johnson, Mr. Sonsini’s partner for 19 years until leaving the firm in 1993. Mr. Johnson, quoting another former Wilson Sonsini partner, said Mr. Sonsini could juggle so many demanding clients because he performs like “a machine gun with every bullet hitting the center of a moving target.”

Mr. Sonsini is not one to offer encouraging pats on the back or ask after colleagues’ children, acquaintances say. “He’s not someone prone to expressions of emotion,” said Kenneth P. Wilcox, who, as chief executive of the Silicon Valley Bank, has worked closely with Mr. Sonsini for several years.

Mr. Morgan, the former Wilson Sonsini partner, said that he did not recall Mr. Sonsini ever raising his voice in the 15 years that they worked together. But Mr. Sonsini’s clients, some so young they seemed barely out of short pants, have not always proved as calm. It is then, when a client is in the midst of an outburst, that the Valley’s superlawyer might be at his best, acquaintances say.

“He’ll be representing a guy who’s pounding the table and beyond mad,” Mr. Robertson said. “But Larry, who has a very quiet style anyway, will calmly take this person through the situation, and patiently explain what the law is and what is possible. I’ve witnessed this on many, many occasions.”

WHEN Mr. Sonsini graduated from the Boalt Hall School of Law at the University of California, Berkeley in 1966, he chose to join a four-lawyer firm in a backwater whose very name, Silicon Valley, had yet to be coined. Over the following decades he orchestrated the firm’s transformation into a 600-lawyer juggernaut.

“Larry Sonsini is a guy who grew with, and then helped to define, Silicon Valley,” said Mr. Campbell of Intuit.

Mr. Sonsini studied securities law at Boalt and from the start of his career he made that his specialty, catering to the Valley’s venture capitalists, some of whom would send a start-up his way that they thought might be ready to go public. In turn, Mr. Sonsini parlayed his ties to the area’s most promising start-ups into a lucrative relationship with the country’s top investment banks, including Goldman Sachs, Morgan Stanley and Merrill Lynch.

“The investment banks wanted to build relationships with certain law firms who were in the industry,” Mr. Sonsini said. “As I got to know these banks, it enabled me to introduce clients to them.”

Mr. Sonsini’s ability to ingratiate himself with those in a position to throw business his way partly explains his rise to the top of the Valley’s legal food chain. So, too, does his business acumen. He is an entrepreneur in a land of entrepreneurs who, by all accounts, has about as a good a feel for corporate strategy as his most gifted clients.

“He’s as good a businessman as he is a lawyer, and he’s built the dominant law firm in Silicon Valley,” said Joseph A. Grundfest, a former Securities and Exchange commissioner who now teaches at Stanford Law School. “That gives him lots of credibility with executives also looking to build successful businesses.

“He gets them, and they get him,” Mr. Grundfest added.

Mr. Conway, the prominent Valley angel investor best known for his early investment in Google, first met Mr. Sonsini around 1980 and said that the lawyer had an immense, unrivaled network of contacts. Mr. Sonsini can open those doors for those he represents — and slam doors shut and cause fits of anger or panic among those who oppose him.

“He has access to every C.E.O. in the Valley,” Mr. Conway said. “They’ll pick up the phone for him immediately.”

As an example, Mr. Conway offers Google, which was founded by Larry Page and Sergey Brin, and which is run by Eric Schmidt. “If you’re going to go crossways with him, you’ve got a problem, because if it’s an issue at Google, he’s going to call Eric Schmidt and Larry and Sergey,” Mr. Conway said. “Or he’ll call David Drummond, who used to work with him and is now a honcho at Google. He has influence everywhere.”

SOME say Mr. Sonsini is a much better deal maker than he is a lawyer. But one prominent rival, Bruce Alan Mann, a senior partner at Morrison & Foerster of San Francisco, dismissed that criticism as unfounded. He said that Mr. Sonsini, who taught securities law at Boalt Hall from the mid-80’s until last year, could quote the intricacies of Delaware case law from memory.

“Anyone who says Larry isn’t much of a lawyer is being jealous,” Mr. Mann said. “He’s as on top of the law as any lawyer I know.”

Others in the Valley describe Mr. Sonsini as a walking conflict of interest, a problem they say is born out of the sheer breadth of companies he and his firm represent. For example, he represents not only Hewlett-Packard but also Sun Microsystems, which he incorporated in 1982 and helped take public in 1986 — and there are no two fiercer rivals in Silicon Valley than those two.

Still, some clients say Mr. Sonsini’s omnipresence does not bother them. “If you really believe this guy isn’t trustworthy, if you believe he can’t silo his approach to giving you advice, then don’t use him,” Intuit’s Mr. Campbell said. Mr. Sonsini, he said, has often told him that he cannot help him because of a conflict. “I trust him,” Mr. Campbell said.

Perhaps Mr. Sonsini’s most pointed potential vulnerability amid the current options scandal is a trait that clients and others generally offer as a compliment: so deep is his understanding of the issues that management is facing that it is often difficult to tell where his legal advice ends and his business counsel begins.

“Larry is a master in my mind of knowing what’s important for the client, and focusing on it, and not letting the legal niceties get in the way of accomplishing the client’s goal,” Mr. Mann said. “He doesn’t let legal issues that can be resolved kill a deal.”

But sometimes such niceties are critical to keeping a client out of hot water. Mr. Sonsini may have offered astute business advice when he helped companies like Brocade contend with the hiring crunch that now lies at the root of the Valley’s options problems — but such advice has also drawn the attention of investigators and regulators who are examining whether it was legally sound.

Although it remains unclear exactly who or how many may have crossed the legal line during the Valley’s boom years, veterans of the dot-com craze said that those swept up in it found themselves in the midst of a financial whirlwind.

“It was a very peculiar time when some of this stuff happened,” Mr. Gunderson, the Valley attorney, said. “I think people to a certain extent lost their bearings.”

Jul 24, 2006
Brocade Communications Fraud Scandal Turns Criminal

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The criminal charges filed Thursday against former executives of Brocade Communications Systems may be a harbinger of more indictments to come in an options backdating scandal that has already cast a shadow over many high-tech companies.

The U.S. attorney’s office for the Northern District of California charged former Chairman, President and Chief Executive Officer Gregory Reyes and former Vice President of Human Resources Stephanie Jensen with securities fraud. It also filed a civil complaint charging fraud and other securities violations, which names former Chief Financial Officer Antonio Canova as well as Reyes and Jensen.

Brocade, a storage networking company in San Jose, Calif., was founded in the late 1990s and granted stock options to new employees, a common practice in the red-hot Silicon Valley job market of the time. The company has already restated results from the years 1999 through 2004 due to accounting issues related to options grants.

Several major high-tech companies are undergoing independent and Securities and Exchange Commission investigations regarding options. Apple Computer, McAfee, Broadcom, Sycamore Networks and Rambus recently have grappled with the issue.

Brocade’s case is ahead of the pack in reaching the criminal stage, but it’s unlikely to be the only company where executives are accused of crimes in this area, according to one observer.

"The stove’s been turned up," said Brian Foley, a lawyer and independent compensation consultant in White Plains, N.Y. "One gets the sense that there’s going to be more, probably considerably more [criminal indictments] at other companies." That may take a while because many other cases are fairly new, he added.

The same U.S. attorney’s office that charged the Brocade executives said last week it has formed a special task force with the FBI to investigate companies in Northern California that may have deliberately backdated option grants with intent to defraud.

Reyes and Jensen orchestrated stock option grants with exercise prices below the price of Brocades’ stock on the day of the grant, according to the U.S. attorney’s office. This type of grant could give the employee an immediate gain, on paper, and was not illegal. But the Brocade executives allegedly made those grants look like another type in which the exercise price is the same as the stock price on the day of the offer. That move let them conceal millions of dollars of expenses from investors, the government said. It alleges that Reyes set earlier grant dates and Jensen falsified documents to make it appear the options had been granted on the earlier date.

The civil complaint accuses Canova of knowing the crimes had taken place, not advising the company’s auditors and audit committee, and signing false and misleading financial statements.

Brocade said Thursday it had no comment on its former employees.

By Stephen Lawson, IDG News Service (San Francisco Bureau)

Brocade not yet off hook
24th July 2006, By Staff Writer

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Some analysts on Wall Street say that the US government might still extend its charges of stock option fraud from former executives of Brocade Communications Systems Inc to the company itself.

Some analysts have said the SEC is very unlikely to reverse the process that has already seen it move towards a settlement with Brocade, based on a proposed $7m fine. Trading in Brocade's stock was relatively quiet on Friday, and on a day when tech stocks were depressed by Dell's disappointing results Brocade's share price fell by only 4%.

But the strength of the action that the SEC and the US Department of Justice have taken against three former Brocade chiefs has made others say that Brocade may be back on the hook.

On Thursday the SEC and the DoJ simultaneously launched civil and criminal charges against Brocade's former CEO Greg Reyes, and its former CFO and vice president of HR, alleging fraud via stock option back-dating. Reyes' lawyer has already issued a statement insisting that his client is innocent.

Kaufman Bros LP analyst Shebly Seyrafi said in a research note issued on Friday: "We are concerned that, with the charges levied against Mr Reyes, the odds have increased that charges will be brought against Brocade itself."

Seyrafi said that this statement was based on the strength of the action taken against Reyes and his former colleagues, the presence of the DoJ as a second body investigating the alleged fraud, and a potential US government desire to make an example of somebody or some corporation.

But all of those factors have been either in play or widely expected for many months. What is not known is whether the DoJ or the SEC have found any new evidence of fraudulent behavior since earlier this year when the SEC made its tentative settlement with Brocade.

In May Brocade said it had put aside $7m to cover an SEC fine related to its past stock option handling, and said that SEC staff had passed this proposed settlement up to the SEC Commissioners for approval. No formal confirmation of a settlement has been made yet.

Earlier in the year, Brocade had talked of a $5m settlement. "It's a fluid situation. As the SEC digs deeper, who knows whether they'll find out about more acts that Brocade could have prevented," said Aaron Rakers, analyst at AG Edwards.

"Unfortunately for Brocade, there is always a fear of the unknown," Rakers said.

Early last year Brocade became one of the very first companies to be investigated for stock option fraud. The many other IT companies that have since come under some form of SEC investigation or enquiry into past handling of stock options include Applied Micro Circuits, Broadcom, outsourcers ACS and CSC, Foundry Networks, Intuit, McAfee, and RSA Security. Among the companies that have announced internal inquires are Apple Computer and CA.

Report: Brocade's ex-CEO could be charged
Broad probe of stock options practices could yield criminal charges against Gregory Reyes, newspaper says.
July 18 2006: 8:15 AM EDT
NEW YORK (CNNMoney.com) -- The former CEO of Brocade Communications Systems could face criminal charges related to stock options timing practices at the firm, according to a published report.

TheWall Street Journal reported Tuesday that Gregory Reyes, who stepped down as CEO of the storage-networking company in January 2005, has been warned by federal prosecutors that he could face charges as part of a federal probe into options. The newspaper cites a person familiar with the case as its source.

While federal investigators are probing scores of companies about the timing and possible back-dating of options to give executives a larger payday, no executive has yet been charged in the probe.

The Journal reports that the Securities and Exchange Commission also is expected to file civil charges in the Brocade (Charts) matter but wouldn't say whether it was against the firm or individuals.

Monday, SEC Chairman Christopher Cox said he expected the agency would bring its first options-timing case "very soon" although he didn't identify any company or individuals, the paper reported.

An option gives its holder the right to buy shares at an exercise price - typically the market value of a company's stock on the date of the award. The paper said the probe of the Brocade options has been going on for more than a year and is examining allegations that the issuance dates of the company's options were manipulated to make them more valuable.

Reyes' attorney is apparently arguing that the former CEO was given the authority by the company's board to make decisions about options grants, and that he was essentially a one-man stock-option committee, according to the Journal.

"There's no allegation of self-dealing or self-enrichment unlike several of the other investigations" Reyes' lawyer, Richard Marmaro, told the paper.

Related: Options controversy hits techs hard.