Ex-Comverse Execs Slammed With Backdating Charges

Staff Reporter -- Electronic News, 8/11/2006

Three former executives of software company Comverse Technology Inc. were charged yesterday for allegedly orchestrating a long-running scheme to manipulate millions of stock option grants to themselves and to employees, according to the Department of Justice (DOJ).

Former CEO Jacob "Kobi" Alexander, former CFO David Kreinberg, and former general counsel William F. Sorin allegedly orchestrated the scheme by "fraudulently backdating the options and operating a secret stock options slush fund," the DOJ said in a statement.

Alexander, Krienberg and Sorin, all of whom resigned from Comverse on May 1 in the midst of an internal company investigation relating to options backdating, have been charged by a criminal complaint filed in the eastern district of New York with conspiracy to commit securities fraud, mail fraud and wire fraud. According to the complaint, between 1998 and 2002, the defendants reaped millions of dollars in profits as a result of their scheme and issued false and misleading financial statements to the company's shareholders and the investing public regarding the true value of the options grants.

The charges were announced by deputy attorney general Paul McNulty and officials from the SEC and the FBI. The charges stem from a coordinated investigation led by the DOJ's corporate fraud task force.

"The Justice Department is determined to see that our markets operate fairly and honestly," General McNulty said in a statement. "We cannot allow corporate leaders to operate under different rules, using 20-20 hindsight to line their own pockets. We will continue to pursue misconduct in any boardroom where we find it."

Comverse is one of a growing list of tech companies that are now being haunted by alleged histories of stock options backdating. The authorities have been cracking down on such claims: in Northern California, U.S. Attorney Kevin Ryan has formed a task force to investigate allegations that Silicon Valley companies and individuals participated in illegally backdating stock options.

In two related actions, the government seized over $45 million from two investment accounts held in the United States in Alexander's name based on his alleged participation in a stock options fraud and a money laundering scheme involving the secret transfer of more than $57 million to accounts in Israel in an effort to conceal the funds from U.S. authorities. In addition, the SEC commenced a civil fraud and injunctive case against all three defendants for their roles in causing Comverse to publicly file false annual and quarterly financial reports and proxy statements from 1991 through 2005.

Initial appearances for Kreinberg and Sorin were scheduled for yesterday before U.S. Magistrate Judge Viktor Pohorelsky in Brooklyn, N.Y. An arrest warrant has been issued for Alexander.

As alleged in the complaint, from 1998 through 2001, Comverse adopted stock option plans designed to provide additional compensation for executives, including the defendants, and other employees. Alexander, Kreinberg and Sorin allegedly fraudulently backdated the options awarded under each of these stock option plans. For example, in 1999 the defendants set the option price $35 a share below the fair market value on the day the options were actually granted. Alexander allegedly took for himself more than 300,000 of those backdated options, for a paper profit of over $11 million.

In addition to the backdating scheme, the complaint also alleges that Alexander and Kreinberg generated hundreds of thousands of backdated options, which they parked in a secret slush fund to be used at Alexander's sole discretion to benefit favored employees. To create the slush fund, Alexander and Kreinberg inserted dozens of fictitious names into the list of option recipients submitted to the compensation committee of the board of directors. Once the Committee approved these options, Alexander and Kreinberg deposited the options in an account aptly named "Phantom" (later re-named "Fargo").

According to the complaint, on two occasions in 2000, Alexander transferred a total of approximately 88,000 options from the slush fund to another top executive. Although the options had a four-year vesting period, on each occasion, Alexander made the options immediately exercisable. The executive exercised the options the day after receiving them, when the stock was trading at nearly double the strike price, and sold the stock at a profit of $4 million.

The defendants' alleged scheme came to light in early March 2006, when a reporter from the Wall Street Journal called Comverse and inquired about the unusual pattern in the timing of the company's stock option grants. In response, the defendants attempted to cover up their scheme by authorizing false statements to be made to the reporter, and by lying to an in-house lawyer for Comverse and to the company's outside auditor. Additionally, Kreinberg logged onto Comverse's computer and attempted to alter a database to hide the slush fund's existence.