While Gary Smith and Hugh Martin, CEOs of Ciena Corp. (Nasdaq: CIEN) and ONI Systems Inc. (Nasdaq: ONIS), were congratulating each other on Monday over the planned merger of their two companies, another man, at another company, may also have been patting himself on the back.

The man is Matthew W. Bross, who appears to have sold the majority of his shares in ONI in just the nick of time.

Bross is not only on the ONI board of directors, he is also a senior VP at Williams Communications Group (NYSE: WCG), a major ONI customer. Until this year, Bross also served as CTO of Williams.

Nearly two years ago, Light Reading revealed Bross's stake in ONI, which he purchased cheap in pre-IPO shares. The stake was so large that it showed up on the company’s S-1 filing with the SEC in March 2000 (see Williams' CTO Profits From His Position ). Now, while Williams faces financial uncertainty (see Williams Winding Down?), and ONI is being swallowed by Ciena in a $900 million all-stock deal (see Ciena and ONI: Wedding of the Year?), Bross is sitting pretty.

Over the last year, he sold more than 1.5 million ONI shares and gave away 20,000 more, all held indirectly (i.e., in a trust, by a spouse, etc.).

According to Securities and Exchange Commission (SEC) records posted on Yahoo (Nasdaq: YHOO), the transactions have brought in nearly $42.6 million. That is an average price of $28.4 per share, far above the $6.20 value of ONI shares in Monday’s Ciena bid, which was a 12 percent premium on Friday’s closing price.

It seems Bross made his moves at the right time. ONI has seen its stock plummet about 85 percent over the last year. Although the company’s stock was up 40 cents (7.22%) Tuesday, as investors reacted to the news of the merger, shares were only trading at $5.94 apiece.

Good judgment aside, Bross's riches and his continued ownership of such large quantities of stock continue to raise eyebrows. “At the very least, there is the appearance of a conflict of interest there," says a Wall Street analyst who asked to remain unnamed. He says it isn’t unusual to issue options to a company, but it is unusual for a CTO, which was what Bross was when the majority of his stake was acquired. (The announcement of Bross's title change at Williams was issued January 8, 2002.) After all, the CTO is the one with the most say as to which vendors the company is going to patronize.

“It might color [Williams’s] judgment on which companies to chose as vendors,” notes Joe Gladue, an analyst with the Chapman Co. He doesn’t, however, believe there is anything inherently unethical about Bross holding such a large stake in ONI.

“Yeah, he has an advantage,” Gladue says, pointing out that since Bross is inside the business, he sees trends before the rest of the world catches a glimpse of them. “But he would have had an advantage even if he held stock in a company that Williams doesn’t do business with.”

It seems the courts agree. A lawsuit filed in October 2000 against Bross and 22 other officers and directors at Williams Communications and parent firm The Williams Companies Inc. (NYSE: WMB) was thrown out by a federal judge in Oklahoma City last November. In the suit, Williams shareholders claimed that Bross and the other officers had breached their fiduciary duties by pocketing nearly $60 million from stock options of partner companies such as ONI (see Shareholders Sue Williams ).

In the case of ONI, the shareholders claimed that Bross, along with Williams president of strategic investments John C. Bumgarten Jr., made more than $40 million from discounted stock that soared after it was offered in public trading.

In his order, Judge Tim Leonard wrote that the shareholders had failed to support their allegations that corporate officers and directors had forsaken their fiscal responsibilities by sanctioning the stock options.

Now, after reaping his $42 million windfall and cleared of the lawsuit, Bross will continue to hold a substantial stake in Ciena, if the deal goes through.

Under the merger deal, each share of ONI common stock will be exchanged for 0.7104 shares of Ciena. Once the deal is completed, Bross’s remaining 192,460 indirectly held ONI shares should translate into about 136,724 Ciena shares. With stock recently trading at about $9, that adds up to more than $1 million.

Most observers agree that the merger between Ciena and ONI is a good move by both companies and the premium paid for ONI stock was not that large. “Chances are that the stock of the combined company will do better than ONI could have done alone,” says Chapman's Gladue.

Bross did not show up for a scheduled interview yesterday to answer queries on this story.

Another shareholder likely to have made money during ONI's heyday is Robertson Stephens managing director Paul Johnson, an analyst who still covers the company and whose original stake in ONI had much in common with Bross's (see Analyst Owns $9M in ONI Systems Stock ). Namely, it consisted of pre-IPO shares and was so large -- more than 100,000 shares -- that it made it into an ONI S-1 form.

At the time, Johnson said that he planned to hold onto his ONI shares as a long-term investment, and that he would not sell any shares even if he was set to downgrade the stock, because, he said, “that would be unethical.” However, last March, Johnson's name appeared in an ONI SEC form for the proposed sale of 54,996 shares in the company at an estimated value of $1.4 million, or more than $25.5 per share.

Johnson was unavailable for comment, but Courtney Weber, a spokeswoman for Robertson Stephens, points out that the SEC document doesn’t indicate that the shares were actually sold. She says that Johnson wouldn’t know if his shares in ONI had been sold, since he had placed them in a blind trust about a year and a half ago.

“Robertson analysts are not allowed to hold shares in companies they cover,” Weber says. “That is company policy.”

She says that analysts who hold stock in a company they are scheduled to cover, have the option of selling or of placing the shares in a blind trust. Johnson chose the latter.

“Once [Paul] put the shares in the trust,” she says, “we don’t know what happens to them, and Paul wouldn’t know. This assures objectivity.”

Still, some observers remain skeptical. “I don’t understand what that means,” one analyst, who asked to remain anonymous, says about the blind trust. “He still knows that he has stock in ONI, right?”

— Eugénie Larson, Reporter, Light Reading
http://www.lightreading.com