Comverse Ex-Execs Second to Face Criminal Backdating Charges

Three former top officers of software maker Comverse Technology Inc. lied to cover up their fraudulent manipulation of the grant dates on their stock options, according to the second criminal complaint filed in the government's widening investigation of options backdating.

In a complaint unsealed last week in the U.S. District Court for the Eastern District of New York, prosecutors charge that CEO Jacob "Kobi" Alexander, CFO David Kreinberg and senior general counsel William Sorin violated federal securities laws and Securities and Exchange Commission rules by conspiring to hide the backdating from shareholders and the company's internal investigators.

Last month the government brought similar criminal charges against three officers of another technology company, Brocade Communications Systems Inc. in California.

In this case prosecutors charge that Alexander alone reaped a $138 million profit from his options and that $6.4 million of that profit came from backdating, the practice of assigning an earlier date to a stock-option grant to make it look like it was awarded when the company's shares were less expensive.

By failing to report the cost of the windfall that the backdated stock recipients gained when they bought at a deep discount and sold at the going price, the defendants presented a false fiscal report to investors, the complaint says.

The government is investigating backdating practices at more than 80 major companies, mostly during and immediately after the technology and telecom stock bubble in the late 1990s.

FBI agents are working on "at least 45 instances of backdated stock options, the newest trend in investor fleecing," FBI Acting Assistant Director James Burrus said in a press release issued when the Comverse complaint was unsealed.

According to an affidavit filed by the FBI in support of charges against the three former Comverse executives, the company began an internal investigation in March into a pattern of suspicious stock-option grants. That investigation led to the resignations of the three officers in May.

In the affidavit the FBI said that, in addition to the backdated shares awarded to the three defendants, Alexander set up a "slush fund" with hundreds of thousands of backdated stock options granted to "phantom" employees and used them as rewards for underlings.

The affidavit said Alexander and Sorin falsely told company investigators that they:

• Actually awarded stock options on the day they said they were issued, not later;
• Always got immediate approval for stock grants from directors who served on a compensation committee;
• Kept their promise to stockholders that they would not backdate stock options; and
• Issued accurate fiscal reports to investors that correctly accounted for the cost of the stock options.

The FBI charged that when the directors discovered the truth, Alexander tried to justify his conduct by claiming that "everyone in the Silicon Valley was doing it [backdating]."

The affidavit said the directors confronted Sorin about the fact that he and Alexander had egregiously overstepped their authority by awarding and backdating stock options; only the Comverse board had the power to do that.

Sorin retorted that he "didn't want to get into technical stuff," the FBI said.

The Justice Department said Kreinberg and Sorin appeared in court and were charged and released after posting $1 million bond each. However, the government said it is still "in the process of getting hold of Mr. Alexander" and had frozen some of his assets.

The three each face a maximum of five years in prison.

The government has not charged Comverse.