IN THE COURT OF CHANCERY OF THE STATE OF DELAWARE IN AND FOR NEW CASTLE COUNTY

JOHN S. DESIMONE,

Plaintiff,

v.

TIMOTHY A. BARROWS, PAUL W. CHISHOLM, GURURAJ DESHP ANDE, PAUL J. FERRI, JOHN W. GERDELMAN, FRANCES M. JEWELS, DANIEL E. SMITH, ANITA BREARTON, KURT TRAMPEDACH, JEFFRY A. KIEL, KEVIN J. OYE,

Defendants

and

SYCAMORE NETWORKS, INC.,

Nominal Defendant.

Civil Action No. 2210-N

AMENDED DERIVATIVE ACTION COMPLAINT

Plaintiff, John S. DeSimone, for his derivative action complaint, based upon the

investigation of his counsel, except for the allegations in paragraphs 13-14 which are alleged on

knowledge, alleges as follows on information and belief:

1. TIns derivative action is brought in the right of, and for the benefit of, nominal

defendant Sycamore Networks, Inc. ("Sycamore" or the "Company"), against members of its

Board of Directors and certain officers, to remedy defendants' breaches of fiduciary duties and

other violations of law which have caused damage to the Company.

2. Defendants have engaged in certain transactions including the exercise of options

with modified grant dates to reap millions of dollars in unlawful windfall profits at the expense

of the Company and its shareholders.

3. A stock option granted to an employee of a corporation allows the employee to

purchase company stock at a specified price - referred to as the "exercise price" - for a specified period of time. Stock options are granted as part of employees' compensation packages to create incentives for them to boost profitability and stock value. When an employee exercises an option, he or she purchases the stock from the company at the exercise price, regardless of the stock's price at the time the option is exercised.

4. The unlawful conduct occurred while defendants were managing the Company.

These defendants authorized, modified, or failed to halt the modification of stock option grant dates in dereliction of their fiduciary duties to the Company as directors and officers, thus causing or allowing the Company to suffer millions of dollars in harm.

5. Option pricing is based on the price of the Company stock on the day of the grant.

If the date of an option grant is modified to a day on which a market price is lower than the price on the day the option is granted, then the employee pays less and the company gets less money for the stock when the option is exercised. Furthermore, the purchaser of the option gets a greater compensation than that to which he or she is entitled. Such conduct is unlawful.

6. On May 19,2006, The Wall Street Journal published an analysis of stock options

granted to chief executive officers of half a dozen companies in an article titled, "U.S. INTENSIFIES STOCK-OPTIONS PROBE: Subpoenas by Prosecutors in Manhattan Office Signal Major Step-up in scrutiny." The subject matter of this article, and several others in previous and subsequent days, was the illegal backdating of stock option grants to senior executives at the expense of the Company and its shareholders.

7. That same day, the staff of the Securities and Exchange Commission informed

Sycamore that it had commenced a formal investigation related to certain stock options granted

2

by the Company during calendar years 1999 through 2001 that were erroneously accounted for under generally accepted accounting principles.

8. Sycamore, which had already conducted an internal investigation through its

Audit Committee in 2005, relating to the accounting of certain stock options that resulted in the restatement of its financial reports for the period of 1999 to 2001, did not reveal at any time the real impetus for the internal investigation or the scope of the internal investigation. In a similar vein, Sycamore did not reveal this new outside investigation by the SEC until May 23, 2006, when it included the information in the last paragraph of an earnings press release.

9. Also on May 23, 2006, U.S. Securities and Exchange Commission Chairman

Christopher Cox was widely quoted as saying that possible stock option backdating is "a matter of ongoing interest to our enforcement division."

10. On June 20, 2006, a Los Angeles Times article entitled "SEC Expands Probe of

Executive Stock Options" reported that a recent study by the research firm Corporate Library suggested that while many companies offer stock option grants on the same date each year, companies could be timing the public release of news to affect the options prices, if not timing the options themselves.

11. From 1999 to 2001 defendants were granted hundreds of thousands of stock

options. Modification of the stock option grant dates, including the practice of back-dating, violated Sycamore's stock option plans, Manipulating stock options to affect their exercise prices also breached defendants' fiduciary duties of care, loyalty, and good faith to Sycamore.

12. Defendants' conduct has and will continue to unjustly enriched Sycamore's top

executives and celiain Director Defendants to the detriment of Sycamore and its shareholders.

3

PARTIES

The Plaintiff

13. Plaintiff John S. DeSimone is a Massachusetts resident and has continuously

owned 700 shares of the Company's common stock since February 4,2002.

14. As a current holder of Sycamore common stock and a holder during the period of

the continuing wrongs alleged herein, including the restatements, the cover up of the wrongs, the limited scope of the internal investigation conducted by the Audit Committee, the failure to require disgorgement or any penalty including discharge of the wrongdoers and the ongoing investigation by the U. S. Attomey and SEC, Plaintiff has standing to assert these claims on behalf of the Company and will fairly and adequately protect the interests of the Company and its other stockholders,

The Nominal Defendant

15. Nominal Defendant Sycamore is a corporation duly organized and existing under

the laws of the State of Delaware, with its principal executive offices and principal place of business at 220 Mill Road Chelmsford, Massachusetts 01824. Founded in 1998, the Company went public in October 1999. Sycamore engages in the development and marketing of optical networking products for domestic and international wire line and wireless network service providers, and government entities with private fiber networks. Its networking product portfolio includes optical switching products, network management products, and design and planning tools.

The Director Defendants

16. The following parties, sometimes referred to herein as the "Director Defendants,"

during the relevant time period, served as members of the BOaI'd of Directors of the COmpaI1Y as follows:

4

17. Defendant Gururaj Deshpande ("Deshpande") has served as Chairman of

Sycamore's board of directors since its inception in February 1998. He served as Sycamore's Treasurer and Secretary from February 1998 to June 1999 and as Sycamore's President from February 1998 to October 1998. The Executive Officer Defendants named in paragraph 24-28 at all material times worked under the direction of Defendant Deshpande.

18. Defendant Daniel E. Smith ("Smith") has served as Sycamore's President, Chief

Executive Officer and as a member of Sycamore's board of directors since October 1998 and has been fingered by a former executive of Sycamore as one of the executives who along with Defendant Jewels approved the illegal stock options.

19. Defendant Timothy A. Barrows ("BalTows") has served as a director since

February 1998. Mr. Barrows has been a member of the Compensation Committee since the Company went public and was a member of the Audit Committee during the period of wrongdoing. Defendant Barrows was a recipient of an illegal stock option grant.

20. Defendant Paul W. Chisholm ("Chisholm") has served as a director since October

2002 and was a member of the Audit Committee during the period of wrongdoing. Defendant Chisholm was a recipient of an illegal stock option grant.

21. Defendant Paul J. Ferri ("FelTi") has served as a director since February 3, 1998.

Mr. Ferri has been a member of the Compensation Committee since the Company went public and was a member of the Audit Committee during the period of wrongdoing. Defendant Ferri was a recipient of an illegal stock option grant.

22. Defendant John W. Gerdelman ("Gerdelman") has served as a director since

September 1999 and was a member of the Audit Committee during the period of wrongdoing. Defendant Gerdelman was a recipient of an illegal stock option grant.

5

The Executive Officer Defendants

23. The following parties, sometimes referred to herein as the "Executive Officer

Defendants," who, under the direction of Mr. Deshpande, served in direct and substantial management positions during the relevant time period as follows:

24. Defendant Frances M. Jewels ("Jewels") was Chief Financial Officer, Vice

President of Finance and Administration, Treasurer and Secretary of Sycamore from 1999 until her resignation effective October 5, 2004. Defendant Jewels was, according to a former Sycamore executive, the "enforcer" of the backdating and modification of stock option grants. On November 2,2004, Ms. Jewels and the Corporation entered into an Agreement and Release, which provides that, "in consideration of Ms. Jewels' execution of such Agreement and Release and the continuation of her employment with the Company through October 4,2005, Ms. Jewels will be covered under the Company's health plan and receive pay during such period equal to her base salary at the time of her resignation, payable in accordance with the Company's normal payroll practices. In addition, all stock options and restricted stock granted to Ms. Jewels during her employment will continue to vest through October 4, 2005." Defendant Jewels was a recipient of an illegal stock option grant.

25. Defendant Anita Brearton ("Brearton") served as Vice President, Corporate

Marketing and as Director of Marketing Programs at times during the relevant time period and was a recipient of an illegal stock option grant.

26. Defendant Kurt Trampedach ("Trampedach") served as the Company's Vice

President of International Sales at times during the relevant time period and a recipient of an illegal stock option grant.

27. Defendant Jeffry A. Kiel ("Kiel") served as the Company's Vice President and

General Manager, Core Switching, Vice President, Product Marketing and as Director of

6

Marketing at times during the relevant time period and a recipient of an illegal stock option grant.

28. Defendant Kevin J. Oye ("Oye") is currently the Company's Vice President of

Systems and Teclmology. Oye served as Vice President of Systems and Technology and Vice President, Business Development at times during the relevant time period and a recipient of an illegal stock option grant.

29. The Director Defendants and Executive Officer Defendants are sometimes

collectively referred to herein as the "D&O Defendants."

FACTS

30. On June 7, 2005, the Company announced that it would delay the filing of its

second quarter Form 10-Q with the SEC pending the conclusion of an intemal investigation relating to the accounting of certain stock options granted during the period from 1999 to 2001, including whether additional stock compensation expenses should have been recorded during the period under review.

31. On August 26, 2005, the Company announced that the Audit Committee of its

Board of Directors had completed an independent investigation into historic stock option accounting. The Company stated that the investigation identified certain stock options granted during calendar years 1999 to 2001 that were incorrectly accounted for under generally accepted accounting principles. As a result, the Board of Directors determined that the Company's financial statements for fiscal years 2000 through 2004 should be restated to reflect the effects of additional non-cash stock compensation expense resulting from certain identified stock options granted during calendar years 1999 to 2001 that were erroneously accounted for.

7

32. On September 12, 2005, after the completion of the so-called internal

investigation, Sycamore filed an Amended 10-K for the fiscal year ended July 31,2004 in which the Company identified the following as the "erroneously accounted for stock options":

a. six new employee stock option grants awarded in which the employment start date records were deliberately modified to provide a lower exercise price for these options;

b. six existing stock option grants awarded that were deliberately cancelled and reissued to provide a lower exercise price for these options;

c. options granted under the April 14, 2000 broad based stock option grant program where, from a review of supporting records, it appeared that the number of options granted likely was not ultimately determined until April 26, 2000;

d. three stock option grants that continued to vest following a change in grantees' employment status without the Company recording an appropriate corresponding stock compensation charge; and

e. one stock option grant that was improperly accounted for due to an inadvertent recording error.

33. The restatement adjustments increased net loss by $0.8 million, $1.6 million and $29.9 million for the years ended July 31, 2003, 2002 and 2001, respectively and decreased net income by $1.4 million for the year ended July 31, 2000. The adjustments reduced previously reported diluted earnings per common share by $.01 and $.12 for the years ended July 31, 2002 and 2001, respectively.

34. At the conclusion of this investigation, no one was penalized and no executive

lost his or her option grant. The Company went on to state that, "these adjustments will not have

8

any impact on historical revenues, cash, or non-stock option related expenses for any prior periods."

35. Notably, the impetus to conduct the internal investigation and the scope of the

investigation was not disclosed to the Sycamore shareholders or the authorities. This information was not disclosed until June 2006 when a former executive of Sycamore filed suit against the Company disclosing certain details.

36. In or about June 2006, Stephen Landry ("Landry") filed a civil complaint (the

"Landry Complaint," attached hereto as Exhibit A) against the Company in Massachusetts Superior COUli in which he claims that Sycamore replaced him after he refused to manipulate the dates of stock options grants. According to the Landry Complaint:

a. the modification of start dates and options grant dates were expressly forbidden by Company policy. Landry Complaint 'If 13.

b. shortly after being hired in 1999, Landry was instructed by Defendant Jewels, then Sycamore's Chief Financial Officer, to change various employees' employment start dates to correspond with days on which the Company's stock prices were lower, so that the employees could receive stock options with lower exercise, or strike, prices. Landry Complaint 'If 11-12.

c. because Landry refused to follow instructions to modify employee start dates, Defendant Jewels decided to replace him with her friend, attorney Robin Friedman, who would follow her instructions. Landry Complaint 'If 15, 16, 20.

d. after Landry was relieved of his duties as Director of Human Resources, the Company began a pattern of changing employees' start dates to illegally and unjustly enrich favored individuals, and corresponding stock options grants were

9

approved by Defendant Jewels and/or Defendant Smith, President of Sycamore for employees including: Gaston Pereirra, Director of Sales for the Americas; Kevin Oye, Vice President of Systems and Technologies; Edward Zaval, Vice President of Customer Service; Attorney Somia Kinnani; and Attorney Marybeth Harper. Landry Complaint ~ 14,21-26.

37. An internal Sycamore memo (the "Memo," attached hereto as Exhibit B), dated January 29, 2001, was issued immediately after the Company's second quarter was attached to the Landry Complaint. According to the Landry Complaint, the Memo was faxed by an employee to Robin Friedman, and listed employees whose start dates should be altered to take advantage of lower strike prices for their option grants. Landry Complaint ~ 27. The Memo substantiates and evidences:

a. that it was the Company's practice to promise stock options with low grant dates, including quarterly lows.

b. that employees were instructed to modify employment agreements and offer letters in order to allow for modification of stock options grant dates. For example the instructions, "please change records" and "clean up date of hire" were handwritten on the margin of the Memo. Memo ~ 2 & 3

c. that Sycamore's internal audit controls were deficient and further, that management and other employees knew this and exploited these deficiencies to conceal their modification of options dates to the detriment of the company. One passage makes clear that changing the hire date of a certain employee would have "[n]o impact of [sic] W-2 issues since the last payroll period for calendar year 2000 ended 12/15/00, [and] [a]ll wages paid after payroll period ended 12/15/00

10

are reflected in calendar year 2001." Memo 'If 1. Another passage provides that changing the employee's start date was a "[l]ow audit risk (exposure on actual payroll registers and on the medical insurance effective dates, both of which will remain unchanged, however, the auditors never reference these documents in their audits). Memo ~ 2 & 3. See Memo attached hereto as Exhibit B.

38. The Memo suggests that management and other employees knew that the practice of backdating stock options was not an "official" Company practice and further that it was wrong. This is evidenced by managements' and employees' reissuance and modification of documents to escape detection in internal audits, and the "Risk Assessment" section contained in the Memo for each employee, including the designation of higher levels of audit risk when other employees and managers knew about the date modifications. Relevant passages evidencing the knowing wrongdoing include:

a. "Employee will be told that this is not something the company does, however given that fact that the stock price dropped her first week of hire this change will be made." Memo ~ 2. TIns statement is also contradicted by the fact that it is included in a memo listing six option grant dates that will be modified, some of which indicate that they have already been modified. See Memo ~ 4 ("Employee understands that this will not be issued again should the stock price decrease in

Q3.").

b. "Maribeth's date of hire will reflect 12/21/00 and her stock option should be granted on 12/21/00. Requires new offer letter for the file to adjust the salary difference between her actual date of hire 11127100 and 12/21100. Adjustment will be addressed in the offer letter in the form of a sign on bonus." Memo ~ 3.

11

c. In reference to the low audit risk of changing one employee's date of hire, the following statement was made: "she does have a relationship with Hassan Ahmed that could work to our advantage should the risk of exposure of this agreement surface." Memo ~ 2.

d. "If possible, this grant should appear as part of the refresh [of stock option grants] if the refresh occurs in Q2." Memo ~ 4.

e. "Risk Assessment: Medium Risk. Employee and Manger [sic] (Eric Swanson) are aware of a cancellation and re-issuance of options .... The grant has been deleted from the system in its entirety. There is an audit risk since the grant was originally issued in Ql and the cancellation occurred after the Ql audit." Memo ~ 4.

f. "Risk Assessment: Medium Risk.

Employee and Manger [sic] (Kurt

Trampedach) are aware of change from the 11/30100 agreed to date of issuance ... . No audit risk since the 11/30100 grant was not part of an audited period." Memo

~ 5.

39. The Landry Complaint alleges that at a January 2005 meeting, Landry showed a copy of the Memo to Richard Gaynor, the Company's then new Chief Financial Officer, and Sycamore President Defendant Daniel Smith, and that, as a result of the information provided by Landry, the Audit Committee conducted an investigation regarding the changes to employees' start dates. Landry Complaint ~ 49-51. However, the Landry Complaint further alleges that the Audit Committee investigation focused only on the individuals specifically named in the Memo and did not expand their inquiry to determine whether changes to employees' start dates was a more widespread practice. Landry Complaint ~ 54. Similarly, Sycamore's amended 10-K for

12

fiscal year ended July 21, 2004, filed on September 12, 2005, only identified several option grants that were improperly accounted for, including six new employee stock option grants awarded in which the employment start date records were deliberately modified to provide a lower exercise price for these options and a few more options grants that were improperly accounted for. This Amended 10K also substantiates the details of the Memo with respect to the six new employees whose dates of hire and stock grants were manipulated.

40. The Memo and the allegations in the Landry Complaint, taken together, indicate

that Defendant Jewels and others were aware of the Company's practice of promising new employees option grants with prices at lows and modifying grant dates to comply with those promises, and further that Defendants Jewels and Smith approved, ratified, failed to halt and even enforced the manipulation of stock options.

Executive Officer Defendants' Receipt of Stock Options with Modified Grant Dates

41. The Memo is not the only source of evidence indicating that Sycamore's D&O

Defendants engaged in the manipulation of stock options. As noted by the Wall Street Journal on May 18, 2006, on or about May 16, 2006, an accounting research firm, the Center for Financial Research and Analysis ("CFRA"), issued a report that examined stock option grants in 1 00 companies that issued a high proportion of stock option grants relative to its executive compensation. The study identified companies that were at risk for manipulating the timing based upon the grant of stock options at exercise prices that matched, or were close to, the lows of the company stock price between 1997 and 2002, followed by a bounce of at least 10% in stock price.

42. The following is also illustrative of the Company's pattern of backdating stock

option grants to its Executive Officers and certain Director Defendants and consistent with the

13

practices identified in the Memo. According to the Memo, options grant dates were changed to

December 21, 2000, resulting in an award to employees of stock options with an exercise price

of $29.1250, immediately preceding a seventy six percent climb in the Company's stock within

twenty days of the date of the grant and located on the quarterly low:

Date Exercise price Price 10 Price 20 % increase 20
trading days trading days trading days after
prior to grant after grant grant
12/21/2000 $29.1250 $56.94 $51.38 76.4% 76 r------------------------------------------------,

71 ---------------------------------------------------------------------------------------------------------------

66 61 56 51 46 41 36 31

26~~~~~~~~~~~~~~~~~~~~~~~~~

-------------------12/21/01; $29.1250
------------------- grant date & quarterly low
a a 0 a a a a a a 0 0 0 0
a a 0 a a 0 a a 0
a a 0 a a 0 a a a a a a a
~ ~ ?J ~ ~ N ~ ~ ~ ~ ~ ~ ~
-...
a fe a r-, :::t -e-' eo l!) r- l!) N
25 r- ~ ~ ~ r- ~ -... ~ ~
r- -... N C\i r- r-
r- r- r- 'e-- r- r- r-
-e-- r- r- r- 43. On April 5, 2001 Sycamore announced that revenue and earnings for the third

quarter would be lower than previously projected primarily due to low customer orders, after

which the Company's stock price dipped. Four days later, on April 9, 2001, Sycamore awarded

Defendant Jewels 500,000 stock options, Defendant Brearton 100,000 stock options, Defendant

Trampedach 100,000 stock options, Defendant Kiel 150,000 stock options and Defendant Oye

200,000 stock options with an exercise price of $7.39, immediately preceding a fifty two percent

climb in the Company's stock within twenty days of the date of the grant and located close to the

quarterly low. In fact on April 25, 2001 Sycamore announced that it had secured that number

14

one position with thirty two percent share in the European Metro DWDM market, after which the

Company's stock price rose significantly.:

Date Exercise price Price 10 Price 20 % increase 20
trading days trading days trading days after
prior to grant after grant grant
4/9/2001 $7.39 $12.00 $11.270 52.5% 12
11
10
9
8
7
.,.... .,.... .,....
!:2 !:2 ~
.,.... fe
~ "'" .,....
~ 44. Under Sycamore's 1999 Stock Incentive Plan, the options were exercisable

immediately, subject to a repurchase right by the Corporation which lapses as the options vest, in

equal quarterly installments over a three year vesting period.

45. In addition, and consistent with the practices identified in the Memo, officers and

directors of Sycamore received stock options granted under the April 14,2000 broad based stock

option grant program, as disclosed in Sycamore's Restatement of Previously Issued Financial

Statements on August 25, 2005. On April 14, 2000, Sycamore's stock closed at $51.00, which

was the single lowest closing price for Sycamore's fiscal year 2000, which ended July 31, 2000.

15

Moreover, April 14, 2000, immediately preceded a forty-five percent climb in the Company's

stock within twenty days of the date of the grant:

Date Exercise price Price 10 Price 20 % increase 20
trading days trading days trading days after
prior to grant after grant grant
4/14/2000 $51.00 $129.00 $74.125 45.34% 46. As depicted in the following historical stock chart, April 14, 2000 immediately

preceded a sharp four month rise in Sycamore's common stock:

85
65
45
0 0 0 a 0 0 a 0 0 0 0 a 0 0 0 a 0 0 a 0 a 0
~ s a ~ S2 ~ s ~ 0 S2 ~ s S2 S2 S2 ~ ~ S2 0 ~ S2 S2
j;;: ~ m !£! CD r2 a C;; t: ~ co
"<t ~ ~ ~ i?i co ~ S; ~ CD ~ ~ s I'- ~ ~ N co ~ ~ s
~ ~ i?i co (0 (0 j;;: j;;: j;;: j;;: co co 47. On November 13, 2001, Sycamore reported its first quarter financial results,

including a decrease in revenue, a recording of $202.5 million in charges, and an increase in net

loss from $26.2 million the previous year to $247.9 million. After the Company's stock price

had fallen significantly and also consistent with the practices identified in the Memo, on

December 13, 2001, Sycamore awarded Defendant Gerdelman 30,000 stock options, Defendant

Ferri 30,000 stock options and Defendant Barrow 30,000 stock options with an exercise price of

16

$4.60, immediately preceding a thirteen percent climb in the Company's stock within twenty

days of the date of the grant and located close to the quarterly low:

Date Exercise price

Price 10 trading days prior to grant

Price 20 trading days after grant

% increase 20 trading days after grant

12/31/2001 $4.60

$5.14

$5.17

12.4%

48. On November 11, 2003, Sycamore announced its first quarter financial results,

__________________________________ 12/17/01; $4.31 _

reporting a $12.2 million net loss. After a significant decrease in stock price, on December 18,

5

4.5------ ----------- 12/13/01; $4.60 grant date

..--

!2

N

..--..

-r--

'e--

..-- ..-- ..-- ..-- ..-- N N N
!2 ~ ~ ~ !2 § ~ !2
£2 ..-- ..--
~ ~ N ~ ..-- ~
N N ..-- -..
..-- ..... ..--
..-- 2003, Sycamore awarded Defendant Gerdelman 30,000 stock options, Defendant Ferri 30,000

stock options, Defendant Barrows 30,000 stock options and Defendant Chisholm 30,000 stock

options with an exercise price of $4.59, immediately preceding a thirty-two percent climb in the

Company's stock within twenty days of the date of the grant and located near the quarterly low:

Date Exercise price Price 10 Price 20 % increase 20
trading days trading days trading days after
prior to grant after grant grant
12118/2003 $4.59 $4.94 $6.07 32.24% 17

6.4
6
5.6
5.2
4.8
4.4
4
C"l
s
£:!
0
v- 11/11/03; $5.36

C"l C"l C"l C"l C"l C"l C"l C"l C"l "<t "<t "<t
e 0 ~ ~ e ~ e e 0 e ~ s
£2 (3 '<"" 1O N m ~
'<"" '<"" £:! N '<"" ~ ~ '<"" '<""
'<"" -- -- N N '<"" -- --
-e- '<"" '<"" '<"" '<"" '<"" '<""
'<"" '<"" '<"" 49. On April 29, 2002 Sycamore Awarded Defendant Jewels 500,000 stock options

and Defendant Oye 1,000,000 stock options with an exercise price of $3.34, immediately

preceding a ten percent climb in the Company's stock within twenty days of the date of the grant

and at located at the low of the month.

Date Exercise price Price 10 Price 20 % increase 20
trading days trading days trading days after
prior to grant after grant grant
4/29/2002 $3.34 $3.76 $3.69 10.5% 4.2 ,-----------------------------------------------,

4.1 4

3.9 - ------------- --------------- -------------------- grant date & monthly low _

3.8 3.7 3.6 3.5 3.4 3.3

18

50. On September 12, 2005, Sycamore disclosed, in its Amended Form 10-K for the

fiscal year ended July 31, 2004, that under the direction of the Audit Committee of its Board of Directors, an investigation into the Company's stock option accounting and a review of supporting records revealed that the number of options granted on April 14,2000 "likely was not ultimately determined until April 26, 2000." Sycamore also disclosed that for the fiscal year ended July 31, 2004, six employees received new employee stock option grants in which the employment start date records were deliberately modified to provide a lower exercise price for these options and for the fiscal year ended July 31, 2004, that six existing stock option grants awarded were deliberately cancelled and reissued to provide a lower exercise price for these options.

51. Irrespective of Defendants' intemal investigation and subsequent restatements, on

May 19, 2006, the SEC commenced its own, formal, investigation into the Company's stock option grants from 1999 to 2001.

The Consequences

52. As a result of the improper modification of grant dates ofthe options issued to the

Executive Officer Defendants and certain Director Defendants, those Defendants have been unjustly enriched in the amount of hundreds of millions of dollars at the expense of the Company. The Company has received and will receive less money from the Executive Officer Defendants and certain Director Defendants when they exercise their options at prices substantially lower than they would have if the options had not been manipulated by back-dating or otherwise.

53. The practice of manipulating stock options not only lined the pockets of the

Executive Officer Defendants and certain Director Defendants at the direct expense of the

19

Company, which received less money when the options were exercised, but also resulted in the overstatement of the Company's profits between 1999 and 2001. This is because options priced below the stock's fair market value when they were awarded brought the recipient an instant paper gain that must be accounted for as additional compensation and treated as an expense to the Company. As a result, the Company, which has already restated its financials for the period from 2000 to 2004, will likely have to do so again to take into account the modification of options grant dates.

54. The practice of manipulating options grant dates has caused the Company to

suffer additional adverse consequences, including (i) the drop in its stock price attributable to the market's loss of confidence in the Company's management, thus increasing the Company's cost of borrowing and otherwise harming its operations, and (ii) exposure to the cost of defending against and potential liability for regulatory actions and private securities class actions.

55. The Defendants' conduct has exposed the Company to investigation by the SEC

and the U.S. Attorney's Office for the District of Massachusetts. On May 19, 2006, the SEC informed the Company that it has commenced a formal investigation related to certain stock options granted by the Company during calendar years 1999 through 2001 that were erroneously accounted for under GAAP. On May 26, 2006, the U.S. Attorney's Office for the District of Massachusetts issued a grand jury subpoena to the Company requesting that the Company produce documents relating to stock option grants.

The Board

56. In 1999 the Company had in place two stock option plans: the 1999 Non-

Employee Director Stock Option Plan (the "Director Plan"), and the 1998 Stock Incentive Plan (the "1998 Plan"). The 1998 Plan was established in order "to advance the interests of the

20

Company's stockholders by enhancing the Company's ability to attract, retain and motivated person who make (or are expected to make) important contributions to the Company."

57. Both option plans were administered by the Compensation Committee, which at

all relevant times was comprised of Defendants Barrows and Ferri. Both option plans required that "[t]he purchase price of the stock covered by an option granted pursuant to this Plan shall be 100% of the fair market value of such shares on the day the option is granted."

58. Between 1999 and 2001, the Company, through the actions of its Board of

Directors and its Compensation Conunittee, granted stock options for the purchase of millions of shares of the Company's conunon stock to the Executive Officer Defendants.

59. In its public filings with the Securities and Exchange Commission and

shareholder approved stock options plans, the Company represented that the exercise price of all of the stock options was in fact the fair market value of the Company's common stock, measured by the publicly traded closing price for the Company stock, on the date of the grant.

60. Contrary to the provisions in the Company's stock option plans, however, as

shown by the contents of the Memo as well as the pattern of grant dates that were highly favorable to the Executive Officer Defendants and others, the stock options were not priced on the date of the grant, but were apparently modified to take advantage of lower stock prices.

61. The Director Defendants stood in a fiduciary relationship with the Company's

shareholders and thereby owed them duties of due care, candor, good faith and loyalty. These duties require the Board of Directors to act in good faith, with the care an ordinarily prudent person in a like position would exercise under similar circumstances, and in a manner he or she reasonably believes to be in the best interest of the Company and its shareholders.

21

62. The D&O Defendants violated their fiduciary duties to the Company by failing to

act with due care, candor, loyalty and good faith, when they either expressly authorized the practice of modifying the date of option grants, or in conscious abrogation of their fiduciary duties, permitted it to occur.

63. The Director Defendants misrepresented and caused the Company to misrepresent

in public SEC filings that the stock options were priced at no less than the fair market value of the stock on the date of the grant, thereby affirmatively concealing the claims set forth herein. The stock option plans and employment agreements, referenced above, were exhibits that were incorporated by reference each year in the Company's Annual Reports on Form 10-K. Also, the compensation of the Executive Officer Defendants, including their stock option grants, were disclosed in the Company's yearly proxy statements promulgated in connection with the Company's annual meetings. The Director Defendants' misrepresentations about the Company's stock option pricing practices were known to be false or were made in reckless disregard of its truth or falsity, and the concealment could not have been discovered through reasonable diligence by the typical shareholder, prior to the publication of the May 19, 2006, Wall Street Journal article,

64. The D&O Defendants' breaches of their fiduciary duties have exposed the

Company to a number of harms including: the expense of internal investigation; the expense of SEC investigations; the potential liability under tax laws and federal securities laws; the possibility of having to restate additional financial results; and liability to stock purchasers.

DERIVATIVE ACTION AND DEMAND FUTILITY ALLEGATIONS

65. Plaintiff brings this action derivatively in the right and for the benefit of the

Company to redress the injuries suffered, and to be suffered, by the Company as a direct result of

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the breach of fiduciary duty, waste of corporate assets, mismanagement and unjust enrichment, alleged herein. The Company is named as a nominal defendant solely in a derivative capacity.

66. Plaintiff will adequately and fairly represent the interest of the Company III

enforcing and prosecuting its rights.

67. Plaintiff is and has continuously been an owner of the Company stock throughout

the continuing wrongful conduct alleged herein.

68. Plaintiff did not make demand on the Board of Directors of the Company to bring

this action on behalf of the Company because such a demand would have been a futile, wasteful and useless act for the following reasons:

a. Demand is excused because the unlawful acts and practices alleged herein cannot be defended by the Director Defendants and are not subj ect to the protection of any independent business judgment since it would undoubtedly be to the benefit of Sycamore to recover the damages caused by Defendants' wrongdoing and to assert these derivative claims.

b. Demand is excused because the wrongs alleged herein constitute violations of the fiduciary duties owed by the Board to the shareholders and are incapable of ratification by the current Board. The Director Defendants are subject to liability for breaching their fiduciary duties to Sycamore by, inter alia, failing to adequately monitor Sycamore's financial reporting, and to detect, prevent and/or halt the modification of stock option grant dates and the material misstatements complained of herein.

c. Director Defendants Ferri, Barrows, Chisholm and Gerdelman are recipients of illegal stock option grants. These four Director Defendants constitute a majority of the Board of Directors.

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d. As a result of their access to and review of intema1 corporate documents; conversations and connections with other corporate officers, employees and directors; and attendance at management and Board meetings, each of the Director Defendants knew the adverse, non-public information regarding the improper modification of stock option grant dates.

e. In addition to the conflicts that exist as a result of their participation in the improper conduct alleged herein, demand is also excused because the Director Defendants have continuously ratified the egregious actions outlined herein, and these same Director Defendants cannot be expected to prosecute claims against themselves, and persons with whom they have extensive inter-related business, professional and personal entanglements, if Plaintiff demanded that they do so. In particular, between 1999 and 2004, Defendants Barrows, Deshpande, Ferri, Gerdelman, and Smith were all part of the Board of Directors that approved, ratified or failed to halt the manipulation of stock options, they are interested and demand upon them is futile. In 2005, all of the D&O Defendants, after full review of the Company's stock option practices that revealed back-dating and canceling and reissuing of stock options, ratified or failed to rectify some or all of the back -dating stock option grants at issue here and are named as defendants herein.

f. Demand is also excused because the Director Defendants participated in, approved and/or permitted the wrongs alleged herein, concealed or disguised those wrongs or recklessly and/or negligently disregarded them, and are therefore not disinterested parties and lack sufficient independence to exercise business judgment as described in the paragraphs herein.

g. Defendants Barrows and Ferri are the current members of the Compensation Committee and have continuously have been members of the Compensation Committee during the time in which the Company's financial statements were rendered inaccurate by the improper

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modification of stock option grant dates. The members of Sycamore's Compensation Committee are responsible for establishing and monitoring policies governing compensation of executive officers. The Committee has the responsibility to review the performance and compensation levels for executive officers, set salary and bonus levels for these individuals and make restricted stock awards or option grants for these individuals under the Corporation's option plan. Therefore, Defendants BaITOWS and Ferri were responsible to review the stock options grant to Sycamore executives during their respective tenures on the Compensation Committee. These Defendants did not fulfill this duty, therefore causing or allowing the Company's executives to obtain umeasonable and unreported compensation via the modification of stock option grant dates. One of the six new employees identified in the Memo is the Vice President of Customer Service, which is an executive office. The Memo provides that this new executive employee was promised that his stock option grants would be issued at the low of the quarter price. That he was made such a promise and that the Compensation Committee had responsibilities involving all compensation of executives further indicates that the members of the Compensation Committee did not fulfill their duties, thereby most likely causing, but at least allowing, the Company's executives to obtain unreasonable and unreported compensation via the modification of stock option grant dates. In addition, grants were made to several other executives including those executives sued herein. Accordingly, there is reasonable doubt that Defendants Barrows and Ferri are disinterested because they face a substantial likelihood of liability for their breaches of fiduciary duty to Sycamore. Thus, demand is futile as to Defendants Barrows and Ferri,

h. The Audit Committee is currently comprised of Defendants Chisholm, Ferri and Gerdelman constituting a majority of the board under Delaware law. Defendants Barrows, Ferri and Gerdelman were on the Audit Committee during the time in which the Company's financial

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statements were rendered inaccurate by the improper backdating of stock option grants. As its charter states, the Audit Committee is obligated "to assist the Board in monitoring (1) the integrity of the financial statements of the Company, (2) the compliance by the Company with legal and regulatory requirements and internal controls, and (3) the independence and performance of the Company's auditors." Defendants Barrows, Ferri and Gerdelman were responsible, as members of Sycamore's Audit Committee, for insuring that the Company's internal controls were adequate and that the Company's quarterly and annual financial statements were accurate. Sycamore's internal controls, however, were woefully deficient as evidenced by the easy identification and exploitation of the deficiencies as highlighted in the Memo as well as the improper modification of stock options granted to the Executive Officer Defendants and other employees. Further, because the Memo indicates that it was apparently fairly widely known within the Company that the internal controls were inadequate, the Audit Committee members either knew about and thus ratified these inadequate controls or did not fulfill their duties as Audit Committee members in ensuring the reliability of the Company's internal controls. As a result of this improper modification of option grant dates, the Company's financials were rendered inaccurate because those financials did not account for the true amount of compensation being granted to Sycamore's executives. Based on the Landry allegations that the Audit Committee focused its internal investigation almost solely on the points raised in the Memo which indicated that the practice was widespread, the fact that a wider investigation was not conducted and no one was penalized and no executive lost his or her option grant also serves as a ratification of the improper modification of stock option grant dates by the Audit Committee. Accordingly, there is reasonable doubt that Defendants Barrows, Ferri and Gerdelman aJ.·e disinterested because they face a substantial likelihood of liability for their

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breaches of fiduciary duty to Sycamore. Thus, demand is futile as to Defendants Barrows, Ferri and Gerdelman, constituting a majority of the Board as required under Delaware law.

i. All of the Director Defendants authorized, approved, ratified or have failed to rectify some or all of the back-dated stock option grants at issue here and are named as defendants herein.

J. The back-dating and manipulation of options as alleged herein was unlawful and not within Director Defendants' business judgment to authorize, ratify or facilitate. There was no basis or justification for modifying stock option grant dates. Further, as highlighted in the Memo, the management and other employees knew that modifying the grant dates of stock options was wrong and they took steps to circumvent the audit procedures. Thus, the practice was designed solely to benefit the Defendants in a manner that was inconsistent with the Company's stock option plans, and the Company's public disclosures, to the detriment of the Company. Hence, the transactions were ultra vires and constituted a waste of corporate assets, and could not have been the product of the proper exercise of business judgment by the Defendants,

k. All of the Director Defendants authorized the filing of Proxy Statements, in support of their nomination as Directors, which failed to disclose that the dates of stock option grants to the Executive Officer Defendants had been modified and failed to disclose the background and impetus for the "internal investigation and failed to disclose the limited scope of the investigation." They also authorized the filing of shareholder approved stock option plans, which misrepresented that the options CatTY the stock price of the day of the award. Any suit by the Director Defendants to remedy the wrongs complained of herein could also expose them to suit for securities fraud and proxy violations; thus, they are hopelessly conflicted in making any

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supposedly independent determination of a demand that they cause the Company to bring this action.

1. The Director Defendants signed the Company's Annual Reports on Form 10-K between 1999 and 2005, which contained the Company's financial statements and which failed to account for the back-dated stock options as compensation and an expense of the Company and failed to disclose the background and impetus for the "intemal investigation and failed to disclose the limited scope of the investigation." As a result, those financial statements of the Company may have overstated its profits and may need to be restated. In 2005, the D&O Defendants signed the Amended Form 10-K which restated the Company's financials for the years 2000 through 2004. Any suit by the Defendants to remedy the wrongs complained of herein could also expose them to suit for securities fraud; thus, they are hopelessly conflicted in making any supposedly independent determination of a demand that they cause the Company to bring this action;

m. Despite the D&O Defendants' breaches of duty, the Board of Directors did not recommend that any Defendant be relieved of his or her duties as director or officer. By maintaining the status quo in light of these breaches of duty, the entire Board failed to exercise proper business judgment and therefore lacks independence.

n. Most egregiously, although the contents of the Memo were made known to the Audit Committee and the results of the intemal investigation were made known to the Board of Directors, the Board of Directors did not require that the Executive Officer Defendants and certain Director Defendants disgorge all of their ill-gotten gains from their improper manipulation of their stock option grants and other misconduct, did not require them to retum all unexecuted stock options to the Company, and did not require them to disgorge their bonuses

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and equity-based compensation to the Company, despite their indisputable breaches of fiduciary duties, which worked a direct harm to the Company. Nor did they take any other action, including commencing legal proceedings, to protect the interests of the Company.

69. Although the underlying wrongful stock option grants alleged herein occurred

during the period of 1999 - 2001, the resulting and continuing injuries to the corporation had been inherently unknowable to the plaintiff or to any independent and/or disinterested body capable of acting on the Company's behalf until 2005's public restatement and amendment of Form IO-K partially disclosing certain of the wrongs complained of herein. The wrongs complained of herein were acts of wrongful self-dealing by fiduciaries on whose good faith and competence Plaintiff had reasonably relied, and were not disclosed by the wrongdoers who were responsible for public disclosure statements, which failed to adequately describe the manipulative timing and backdating practices engaged in by the D&O Defendants and the true reasons for the intemal investigation and its limited scope. As such, the applicable and analogous statutes of limitations are subject to the doctrine of equitable tolling. Further, the false disclosures made by D&O Defendants prior to the restatement and amendment of Form IO-K constitute affirmative acts of concealment and/or misrepresentation by D&O Defendants, especially when given the many opportunities to discover the practice of backdating of stock options and/or make proper disclosures with each subsequent filing of financial information, resulting in continuing hal'm to the Company. Thus, this also results in tolling of the applicable and analogous statutes of limitations.

COUNT I

Against the D&O Defendants for Breach of Fiduciary Duty

70. Plaintiff incorporates by reference and realleges each and every allegation set

forth above, as though fully set forth herein.

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71. The D&O Defendants owe the Company fiduciary obligations. By reason of their

fiduciary relationships, the D&O Defendants owed and owe the Company the highest obligations of good faith, loyalty, due care and candor.

72. The D&O Defendants, and each of them, violated and breached their fiduciary

duties of care, loyalty, good faith and candor.

73. Each of the D&O Defendants authorized, or by abdication of duty, permitted the

date of stock options granted to the Executive Officer Defendants to be improperly modified, leading to the restatements and the SEC and U.S. Attorney investigations. These actions were not a good faith exercise of prudent business judgment to protect and promote the Company's corporate interests.

74. As a direct and proximate result of the D&O Defendants' breaches of their

fiduciary duties, the D&O Defendants have caused, and will continue to cause, the Company to suffer substantial monetary damages as a result of the wrongdoing described herein, as well as further and even greater damage in the future, including damage to the Company's reputation, business and good will.

75. The Company has been directly and substantially injured by reason of the D&O

Defendants' intentional breach and/or recldess disregard of their fiduciary duties to the Company. Plaintiff, as a shareholder and representative of the Company, seeks damages and other relief for the Company, in an amount to be proven at trial.

76. Plaintiff has no adequate remedy at law.

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COUNT II

Against the Executive Officer Defendants for Aiding and Abetting Breaches of Fiduciary Duty

77. Plaintiff incorporates by reference and realleges each and every allegation set

forth above, as though fully set forth herein.

78. By their conduct complained of herein, the Director Defendants have breached

fiduciary duties of loyalty, due care, candor and good faith. The Director Defendants have a

fiduciary duty to exercise prudent business judgment to protect and promote the Company's

corporate interests. The Director Defendants authorized, or by abdication of duty, permitted the

grant date of stock options granted to the Executive Officer Defendants to be improperly

modified leading to he restatements and U. S. Attorney and SEC investigations. As described

herein, the Director Defendants did not act alone in their scheme.

79. The Executive Officer Defendants knowingly aided and abetted the breaches of

fiduciary duty committed by the Director Defendants to the detriment of the Company. Indeed,

the modification of stock option grant dates leading to the restatements and U. S. Attorney and

SEC investigations could not have taken place without the active participation of the Executive

Officer Defendants, Furthermore, Executive Officer Defendants were the beneficiaries of the

wrongs complained of and were unjustly enriched.

80. The Executive Officer Defendants each knew of the existence atld extent of the

fiduciary duties owed by the Director Defendants to the Company as members of the Board of

Directors and members of the Audit Committee and Compensation Committee.

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81. The Executive Officer Defendants knew or were reckless or negligent in not

knowing that Director Defendants violated and breached their fiduciary duties of care, loyalty, candor and good faith.

82. The Executive Officer Defendants knew or were reckless or negligent in not

knowing that the Director Defendants authorized, or by abdication of duty, permitted the stock options granted to the Executive Officer Defendants to be back-dated. These actions were not a good faith exercise of prudent business judgment to protect and promote the Company's corporate interests.

83. By their respective conduct, each Executive Officer Defendant knowingly

participated in the breaches of fiduciary duty by the Board members on the Compensation Committee, the members of the Audit Committee, and provided substantial assistance and encouragement to such Committee members in violating their fiduciary duties in the manner and by the actions described in this Complaint.

84. As a direct and proximate result of the Executive Officer Defendants aiding and

abetting the Director Defendants' breaches of their fiduciary duties, the Executive Officer Defendants have caused, and will continue to cause, the Company to suffer substantial monetary damages as a result of the wrongdoing described herein, as well as further and even greater damage in the future, including damage to the Company's reputation, business and good will.

85. The Company has been directly and substantially injured by reason of the

Executive Officer Defendants' aiding and abetting of the Director Defendants' intentional breach and/or reckless disregard of their fiduciary duties to the Company. Plaintiff, as a shareholder and representative of the Company, seeks damages and other relief for the Company, in an amount to be proven at trial.

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86. Plaintiff has no adequate remedy at law.

COUNT III

Against the Executive Officer Defendants and Certain Director Defendants (Chisholm, Gerdelman, Ferri and Barrows) for Unjust Enrichment

87. Plaintiff incorporates each and every allegation set forth above, as though fully set

forth herein.

88. As a result of the improper modification of the grant dates of options granted to

them, the Executive Officer Defendants and certain Director Defendants have been and will

continue to be unjustly enriched at the expense of and to the detriment of Sycamore.

89. Accordingly, this Court should order the Executive Officer Defendants and

certain Director Defendants to disgorge all profits, benefits and other compensation obtained by

the Executive Officer Defendants and certain Director Defendants and each of them, from their

wrongful conduct and fiduciary breaches described herein, and should order the options held by

the Executive Officer Defendants and celiain Director Defendants which have not yet been

exercised, to be rescinded or repriced at the market price of Sycamore's stock on the dates the

Court finds that those options were actually, in fact, granted.

90. Plaintiff has no adequate remedy at law.

COUNT IV

Against the D&O Defendants for Gross, Reckless and Intentional Mismanagement

91. Plaintiff incorporates by reference and realleges each and every allegation set

forth above, as though fully set forth herein.

92. By their actions alleged herein, the D&O Defendants abandoned and abdicated

their responsibilities and fiduciary duties with regard to prudently managing the assets and

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business of the Company 111 a manner consistent with the operations of a publicly held

corporation.

93. As a direct and proximate result of the D&O Defendants' gross, recldess and

intentional mismanagement and breaches of duty alleged herein, the Company has sustained and

will continue to sustain significant damages in the millions of dollars.

94. As a result of the misconduct and breaches of duty alleged herein, the D&O

Defendants are liable to the Company and Plaintiff has no adequate remedy at law.

COUNT V

Against the D&O Defendants for Corporate Waste

95. Plaintiff incorporates by reference and realleges each and every allegation

contained above, as though fully set forth herein.

96. By failing to properly consider the interests of the Company and its public

shareholders and by failing to conduct proper supervision, the D&O Defendants, without any

valid corporate purpose, have caused the Company to waste valuable corporate assets solely for

the financial gain of the Executive Officer Defendants by, among other things, improperly

granting stock option grants, improperly manipulating stock options, failing to recover

improperly seemed profits, damaging the goodwill and reputation of the Company, and exposing

the company to civil and criminal liability, for which they are liable.

97. Plaintiff has no adequate remedy at law.

COUNT VI

Against the Executive Officer Defendants and Certain Director Defendants (Chisholm, Gerdelman, Ferri and Barrows) for Breach of Contract

98. Plaintiff incorporates by reference and realleges each and every allegation set

forth above, as though fully set forth herein.

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99. As a result of the improperly manipulation options granted to them, the Executive

Officer Defendants and certain Director Defendants have breached their employment agreements with the Company and violated the stock option plans, all of which provide that the exercise price of all of the stock options would be no less than the fair market value of the Company's common stock, measured by the publicly traded closing price for the Company stock, on the date of the grant.

100. The Company and its shareholders have been damaged by the Executive Officer Defendants' and certain Director Defendants' breach of contract.

PRAYER FOR RELIEF WHEREFORE, plaintiff demands judgment as follows:

A. Against the D&O Defendants and in favor of the Company for the amount

of damages including pre and post judgment interest sustained by the Company as a result of the D&O Defendants' breaches of fiduciary duties, gross mismanagement, waste of corporate assets and unjust enrichment;

B. Extraordinary equitable and/or injunctive relief as permitted by law,

equity, and state statutory provisions sued hereunder, including attaching, impounding, imposing a constructive trust on or otherwise restricting the proceeds of Defendants' trading activities or their other assets so as to assure that plaintiff on behalf of the Company have an effective remedy;

C. Awarding to the Company restitution from the Executive Officer

Defendants and certain Director Defendants, and each of them, and ordering disgorgement of all profits, benefits and other compensation obtained by the Executive Officer Defendants and certain Director Defendants as a result of the conduct alleged herein including pre and post judgment interest thereon;

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D. Awarding to the Company restitution for any Executive Officer Defendant

or Director Defendant not yet identifiable by Plaintiff who received profits or benefits from the

illegal conduct alleged herein including pre and post judgment interest;

E. Granting an injunction preventing future exercise of any stock option

grants by any current or former Director or Officer until such time as the complete scope of the

illegal practice identified herein is determined;

F. Awarding to plaintiff the costs and disbursements of the action, including

reasonable attorneys' fees, accountants' and experts' fees, costs, and expenses; and

G. Granting such other and further relief as the Court deems just and proper.

Dated: Augustlb, 2006

CHIMICLES & TlKELLIS LLP

-

By: --{--r---=~~~"'--"'--=~....:::;

ela S. Tikelhs (#2172)

A. Zachary Naylor (#4439) One Rodney Square

Post Office Box 1035 Wilmington, DE 19899 Tel: (302) 656-2500

Fax: (302) 656-9053

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