biz +tech SECTION C + 10.11.2007 + THURSDAY + SAN JOSE MERCURY NEWS FC market report +0.3% ›› Nasdaq ›› 2,811.61 ›› +7.70 -0.6% -0.2% — +0.1% ›› Dow Jones ›› 14,078.69 ›› -85.84 ›› S&P 500 ›› 1,562.47 ›› -2.68 ›› $$1.561 trillion +0.3% ›› Mercury News 150 ›› Bonds* ›› 4.65% ›› — ›› Dollar (vs. yen) ›› 117.25 ›› +0.6 www.mercurynews.com/business *10-year Treasury ›› PROFIT WARNINGS DRAG DOWN BLUE CHIPS, SPARE TECH Data and analysis, 4C and @MercuryNews.com/business Tech ticker ›› am revenue rises 13% in Q3 ›› Analyst boosts Cisco share-price forecast ›› Maxim sues rival over patent ›› L 2C START-UP WON’T SAY HOW IT MAKES ITS SILICON INK BUT PREDICTS IT WILL DRAMATICALLY CUT THE COST OF SOLAR POWER Solar power’s Brocade paying secret recipe legal bills COSTS JUMPED AS EX-CEO FOUGHT CHARGES IN COURT By Chris O’Brien and Jack Davis Mercury News Stock options Brocade may have gotten rid of former CEO Greg Reyes, but the company is still getting stuck with the bill for his legal woes. And those costs are growing. In August, Reyes was found guilty on 10 counts for his part in the San Jose company’s stock-option backdating scandal. He has appealed that verdict and is awaiting sentencing. Accor ding to the company’s Reyes filings with the Securities and Exchange Commission, the company has spent about $38.4 million in legal fees this year, which is when Reyes’ trial occurred. It won’t say how much of that was paid to cover Reyes in particular, but during its third quarter ended July 28, when the bulk of his criminal trial took place, Brocade spent $18 million in legal fees, compared with $3 million during the year-before quarter, a $15 million in- By Matt Nauman Mercury News SeeBROCADE , Page 6C Conrad Burke, the CEO of Innovalight, walked into a room with a small solar cell in one hand and a bottle of black liquid in the other. He’s betting that liquid will revolutionize the solar panel industry and help his company grab a big share of the booming green energy market. The liquid is silicon ink, a secret nanotechnology recipe it developed that the company says lets it make solar cells that are more efficient than current models, at a lower price. ‘‘We have embarked upon . . . a new frontier of silicon,’’ said Burke, who joined Innovalight as president and chief executive in 2005. Innovalight comes out of stealth mode today. It will announce $28 million in new funding as well as plans to open a 30,000-square-foot manufacturing facility in Sunnyvale early next year. The company, based in Santa Clara, intends to start selling its solar cells in 2009. It’ll enter a booming market. Solar sales, accor ding to researcher CLSA, will grow SeeINNOVALIGHT , Page 6C Nigeria goes after scammers Dean Takahashi » Tech Talk Some people are gullible. Some are greedy. Some are stupid. That’s how Ibrahim Lamorde explains why so many have fallen for e-mail financial scams that have originated from his home country of Nigeria over the years. We shouldn’t have to say it. But don’t be dumb. Don’t fall for an e-mail scam. But enough of us do it that Lamorde, director of operations for the Nigerian government’s Economic and Financial Crimes Commission, has a full-time job. We’ve all received e-mails that are part of SeeTAKAHASHI , Page 3C Online Extra Find clean energy news, video and commentary in our Green Energy section at www.mercurynews.com/greenenergy. ABOUT INNOVALIGHT MERCURY NEWS ILLUSTRATION What: Maker of silicon-ink-based solar cells enabling more affordable solar power When: Expect production to begin in 2009 How many: Workforce of about 25 expected to triple in the Where: Santa Clara, but soon next year will move and open a News: Company comes out of manufacturing facility in stealth mode today, announces Sunnyvale $28 million in new funding and plans to open plant Who: Conrad Burke, chief executive officer and president How it works: ‘‘We start off with atoms,’’ Burke said. ‘‘We make these extremely fine powders, particles that are billionths of a meter in size.’’ They then become silicon ink, which is used to make solar cells. Endorsement: The Department of Energy has invested several hundred thousand dollars in collaborative research with Innovalight and expects the company to apply for bigger grants in the near future. ‘‘We’re looking forward to watching them grow,’’ said one DOE official. Source: Innovalight; Mercury News research Housing slump likely to deepen Realtors group sees ’08 drop in sales, prices. ›› Sue McAllister reports, 3C www.cathaypacific.com/us Travel from Bay View to ensures you’ll arrive refreshed, with a great outlook of your own. Harbor View. Cathay Pacific Airways offers 2 daily non-stop flights from SFO to Hong Kong. Our newly expanded service lets you move from one great view to another with ease. On board, our traditional Asian hospitality 6C MERCURYNEWS.COM SAN JOSE MERCURY NEWS THURSDAY, OCTOBER 11, 2007 biz+tech Securities and Exchange Commission Agency: Probe of stocks plan to continue CHIEF ENFORCER SAYS AUTOMATIC TRADING PROGRAM MAY SHIELD INSIDER-TRADING ACTIVITY By Mark Schwanhausser Mercury News While giving a nod to legitimate reasons for executives to use automatic stock-trading plans, the Securities and Exchange Commission’s enforcement director warned Wednesday that the agency is continuing to probe whether the plans are shielding insidertrading abuses. ‘‘The whole point was to not get people into investigations,’’ said Linda Chatman Thomsen in comments before more than 1,400 people attending the National Association of Stock Plan Professionals conference in San Francisco. ‘‘If people are abusing them, it will be bad for everyone who is using them.’’ Questions arose about the plans — known as 10b5-1 plans after a section of securities rules — when a Stanford researcher estimated that executives who use the plans were generating returns from 4.1 to 7.4 percent higher than insiders who didn’t use them. That triggered Thomsen to warn in a March speech that the SEC was taking a ‘‘hard’’ look at the issue. Thomsen noted the probe comes on the heels of enforcement actions against General Electric and Tyson Foods for failing to disclose executive perks and the stock-option backdating scandal that has entangled scores of Silicon Valley companies and top executives. ‘‘We are not in the business of telling people what to do,’’ she said. Unfortunately, ‘‘that has been translated . . . into anything goes.’’ During Wednesday’s speech and a subsequent panel discussion of 10b5-1 plans, Thomsen declined to detail the status of the SEC’s review, whether the agency is investigating individual companies, or whether the agency is considering broader disclosure or tighter rules. Introduced in 2000 as part of a broader securities reform, 10b5-1 plans enable executives to buy and sell company stock virtually year-round, regard- less of insider knowledge or trading ‘‘blackouts.’’ Financial planners and brokers tout the plans as a smart way for executives to take money off the table and diversify their portfolios. The plans are designed to insulate executives from allegations of insider trading. The main stipulation is that executives must set up a written, systematic trading plan when they have no inside information, then hand off the actual trading to a broker or other third party. Two attorneys on the panel offered hypotheses for why executives generate higher returns than counterparts who don’t adopt plans. The plans establish disciplined criteria for sales, automatically taking money off the table in good times and cashing out when stock prices falter. ‘‘It doesn’t create a presumption of unlawful trading,’’ said Ronald Mueller, a partner with Gibson, Dunn & Crutcher in Washington, D.C. Still, they outlined several areas of concern, if only because the trading within the plans raises the appearance of insider trading. It’s possible to start trading almost immediately after adopting the plan. Some executives might be tempted to establish plans to sell stock when they anticipate the stock price might fall in a coming quarter, perhaps because a big customer has warned it intends to renegotiate a contract. And erratic trading also looks suspicious, even though that could occur because the stock misses a target price for months at a time. But the suspicions are especially keen, the panelists said, when executives modify, suspend or terminate their plans. For example, a pension is suing Countrywide Financial after CEO Angelo Mozilo sold more than $50 million of stock through a 10b5-1 plan he had modified about the time when regulators were scrutinizing subprime loans. ‘‘It’s dangerous to terminate or modify a plan,’’ said Alan Dye, a partner with Hogan & Hartson in Washington, D.C. ‘‘It’s better to just go ahead and live with the plan.’’ Mark Schwanhausser reports on personal finance email@example.com (408) 920-5543 Apple, AT&T sued over iPhone USERS ACCUSE COMPANIES OF SETTING UP MONOPOLY WITH EXCLUSIVE SERVICE CONTRACTS Associated Press Economic worries hyped, analysts say By Greg Robb MarketWatch Complaints over Apple’s use restrictions and recent software update for the iPhone have erupted in two lawsuits alleging Apple and its carrier partner, AT&T engaged in illegal monopolistic behavior. Two separate lawsuits were filed Friday in San Jose — one in federal court and the other in state court and both seeking class-action status. The federal case accuses the companies of unfair business practices and violations of antitrust, telecommunications and warranty laws. The state case raises some of the same allegations. Apple spokeswoman Susan Lundgren and AT&T spokesman Mark Siegel both declined to comment on them Wednesday. The federal case was filed by the firms of Hoffman & Lazear in Oakland and Folkenflik & McGerity in New York on behalf of iPhone owners Paul Holman and Lucy Rivello. The state case was filed by Saratoga attorney Damian Fernandez on behalf of California resident Timothy Smith. AT&T is the exclusive U.S. carrier for Apple’s iPhone. By not allowing consumers to modify their iPhones to work on other carrier networks, the two companies conspired from the beginning of their partnership to maintain a monopoly, the federal lawsuit alleges. The companies are unlawfully restricting consumer choice by preventing users from ‘‘unlocking’’ their iPhones, and Apple intentionally disabled unofficial third-party pro- BROCADE Legal costs increased Continued from Page 1C crease. As typical for most publicly traded companies, Brocade has signed employment agreements with its directors and executives to pay legal expenses for company-related matters. The company also has taken out a standard insurance policy to cover those costs, accordin g to Michelle Lindeman, a Brocade Communications Systems spokeswoman. But what’s less clear is what happens in a situation like Reyes’. In January 2005, the company announced that Reyes had stepped down as chief executive. A few weeks later, the company disclosed it had signed a lucrative, two-year consulting agreement with Reyes that would pay him $910,000 a year and allow his remaining stock options to continue to vest. But in July of that year, the company announced the agreement had been ‘‘terminated’’ and that Reyes would be receiving no further payments. Apparently, that doesn’t apply to his legal expenses. Lindeman declined to elaborate on the company’s obligations, or whether it would consider trying to force Reyes to reimburse Brocade if his appeals are unsuccessful. Reyes lawyer Gregory Marmoro did not respond to a request for comment. The stock-option backdating scandal forced Brocade to restate several years’ worth of earnings. The company reached a settlement with the SEC in May this year and agreed to pay $7 million. But Reyes continues to fight. He could be forced to pay millions of dollars in fines. And he could be sentenced up to 20 years in prison. Reyes is not the only former Brocade executive getting a hand from the company. Brocade also has been stuck with the bill for the defense of Stephanie Jensen, former human resources chief. Jensen’s trial is scheduled for next month. Although the mounting costs and restatements have hurt the company’s bottom line, cutting profit in the most recent quarter by almost twothirds, investors have shrugged it off. The company’s stock closed at $8.73 a share Wednesday. That’s up about 25 percent since Reyes stepped down as CEO. Chris O’Brien reportsonbusinessandtechnology firstname.lastname@example.org (415) 477-2504 grams or rendered unlocked phones useless with its software update, the lawsuit alleges. Apple issued the update Sept. 27 after warning users that any ensuing damage to iPhones with unauthorized modifications was not covered by the product’s warranty. It is unclear how many iPhones were disabled or how many iPhone owners have modified their handsets. Some hacker communities estimated that thousands of people have downloaded ‘‘unlocking’’ programs, while AT&T’s Siegel says the company has heard from ‘‘very few’’ customers that have done so. The federal lawsuit stated it didn’t know how large the affected class could be but pegged the number at 100 or more and anticipates ‘‘there will be millions.’’ Apple has sold more than 1 million iPhones since they hit the market June 29. WASHINGTON — The financial turmoil that began in the subprime mortgage sector but spread worldwide won’t force the U.S. economy into recession, according to a panel of experts at the Peterson Institute for International Economics. The widespread concern that the financial turmoil will curtail bank lending to businesses and consumers and therefore slow spending is ‘‘much ado about very little,’’ Adam Posen, deputy director of the institute said at a news conference presenting the think tank’s economic outlook. The biggest area of concern is in Europe, especially banks in German and Italy, he said. In those two countries, many of the banks are semipublic and were much more casual about the risks of their investments, Posen added. Michael Mussa, a senior fellow at the Peterson Institute and former chief economist at the International Monetary Fund, agreed that worries about a recession were overblown. ‘‘It is a little overdone what the turmoil will do to the economy,’’ he said. Mussa noted that economists were convinced the economy would tank after the stock-market crash in 1987 and the market turmoil in 1998. In both cases, the economy came in higher than forecast. He also said he has trimmed his U.S. growth forecast for 2007 gross domestic product to a 2 percent annual rate, from a previous estimate of 2.25 percent. Through the end of 2008, Mussa predicted that the economy should continue to grow around a 2 percent rate, down from his prior forecast of 2.5 percent. [ B USINESS B ANKING ] GET YOUR BUSINESS BOOMING. INNOVALIGHT lStart-up gets funding Continued from Page 1C from $15 billion in 2006 to $36 billion in 2010. Much of that development is coming from Silicon Valley companies, including SunPower, Nanosolar, MiaSole, Solyndra, SoloPower and others. The distinction for Innovalight, said Burke, an Irishman who previously worked in manufacturing and operations management for several companies as well as a stint as a venture partner with Sevin Rosen Funds, is how it makes its cells and how much they’ll sell for. In an interview this week, Burke described the company’s manufacturing process in only general terms but said Innovalight has ‘‘a lock on how we do this. We describe ourselves as having the Coca-Cola formula.’’ Innovalight creates nanoparticles of silicon that it uses to make ink ‘‘and we can end up with something that looks not very different from what a solar cell looks like today, except we got there substantially faster and cheaper, and we use less material,’’ he said. The goal is to achieve ‘‘double digit’’ efficiency, higher than current levels for other thin-film-based solar cells, although Burke wouldn’t reveal a specific number. The industry standard is 14 or 15 percent, although some companies talk about reaching 20 percent efficiency. Efficiency ‘‘This technology has the potential to get well below 50 cents a watt,’’ Innovalight CEO Conrad Burke says. The Web site solarbuzz.com says solar power’s retail price per watt in the United States is $4.84 this month. that are an order of magnitude cheaper than what’s available today. ‘‘Certainly, long term, we believe this technology has the potential to get well below 50 cents a watt,’’ he said. The Web site solarbuzz.com says the retail price per watt in the United States is $4.84 this month. That combination of new, affordable technology makes Innovalight interesting to the Department of Energy. The agency has worked closely with Innovalight on collaborative research, said Craig Cornelius, its program manager for solar technology. ‘‘We see great promise in the company,’’ said Cornelius. ‘‘They’re building a great science team.’’ Innovalight’s $28 million in third-round funding was led by Convexa Capital of Norway. ‘‘The company’s silicon ink process to make cheaper solar cells offers huge potential to help accelerate INNOVALIGHT the growth in the overall solar market,’’ said Innovalight CEO Conrad Burke cites Bjorge Gretland, Convex‘‘a new frontier of silicon.’’ a’s managing partner who will join Innovalight’s board. measures the percentage of absorbed light converted to Matt Nauman electricity. reports on green energy As far as price, Burke talks email@example.com (408) 920-5701 about producing solar cells HURRY IN. OFFERS END NOVEMBER 23, 2007. For the branch nearest you, call (800) 488- 2265 or go to bankofthewest.com. ©2007 Bank of the West. Member FDIC. 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