Comverse Execs Face Fraud Charges for Options Backdating

Former Chief Executive Officer Jacob “Kobi” Alexander, former Chief Financial Officer David Kreinberg, and former General Counsel William Sorin allegedly orchestrated the scheme by fraudulently backdating the options and operating a secret stock options slush fund, according to the DoJ announcement.

All three former executives resigned from Comverse on May 1, 2006, during an internal company investigation relating to options backdating. They have been charged by criminal complaint filed in the Eastern District of New York with conspiracy to commit securities fraud, mail fraud and wire fraud.

In related actions, according to the DoJ announcement, 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 US authorities. Additionally, the Securities and Exchange Commission (SEC) instigated a civil fraud and injunctive case against all three former executives for their roles in causing Comverse to publicly file false annual and quarterly financial reports and proxy statements from 1991 through 2005.

The DoJ complaint alleges that, from 1998 through 2001, Comverse adopted stock option plans and represented in proxy statements and other company filings that the options would be priced at “fair market value” on the date the options were granted. However, according to the complaint, Alexander, Kreinberg and Sorin fraudulently backdated the options awarded under each of these stock option plans to days when the stock was trading at periodic low points. In one such instance in 1999 the defendants set the option price $35 a share below the fair market value on the day the options were actually granted and Alexander allegedly took for himself more than 300,000 of those backdated options, for a paper profit of over $11 million, the announcement said.

The complaint also alleges the defendants fraudulently circumvented accounting and disclosure rules by backdating the grant documents then issuing false proxy statements and periodic public filings misrepresenting that Comverse’s stock options were granted at fair market value.

A Slush Fund

In addition to the backdating scheme, Alexander and Kreinberg allegedly generated hundreds of thousands of backdated options they placed in a secret slush fund to be used at Alexander’s sole discretion to benefit favored employees. To create the slush fund, the DoJ claims 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 named “Phantom” and later re-named “Fargo,” the complaint said.

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 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 scheme was uncovered 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. The DoJ announcement said the defendants attempted to cover up the scheme by authorizing false statements to be made to the reporter, and by lying to an in-house lawyer and the company’s outside auditor. Kreinberg also allegedly logged onto Comverse’s computer and attempted to alter a database to hide the slush fund’s existence.

According to a news report from the Wall Street Journal on Wednesday, Alexander and Kreinberg lied to the company attorney, saying that the grants had been fortuitous and not backdated, causing the company to falsely tell the Journal that grants had been approved on the day the company said they had, according to the affidavit. Kreinberg also lied to the company’s outside auditors, Deloitte & Touche, attributing any discrepancies in stock-option grant dates to the “sloppy” work habits of the company’s former CFO. Kreinberg used an assistant’s password to change the date of the phantom account’s closing to a day when hundreds of other accounts were closed, so investigators would be less likely to notice it, the affidavit said, according to the news report.

The affidavit said Alexander was “awarded by far the most options every year” and that Kreinberg and Sorin “typically ranked in the top ten.”