Former Comverse execs charged with stock-options fraud

IDG News Service - Three former executives of software vendor Comverse Technology Inc. have been charged in connection with backdating millions of the company's stock options, federal officials said.

Former CEO Jacob "Kobi" Alexander, former Chief Financial Officer David Kreinberg and former General Counsel William F. Sorin are also accused of operating a secret stock options slush fund, said officials at the U.S. Department of Justice, the U.S. Securities and Exchange Commission and the FBI.

The three, all of whom resigned from Comverse on May 1 in the midst of an internal investigation, were charged today with conspiracy to commit securities fraud, mail fraud and wire fraud.

Between 1998 and 2002, the defendants reaped millions of dollars in profits as a result of their scheme and issued misleading financial statements to the shareholders and investors about the true value of the options grants, the DOJ said in a complaint.

The former Comverse executives are the second group to be charged in connection with options backdating. The SEC has been investigating several high-tech companies for irregularities in connection with granting employees stock options, a common practice in the IT industry in the late '90s.

Last month, two former executives with storage networking vendor Brocade Communications Systems Inc. were charged with securities fraud. This month, Apple Computer Inc. said it may have to restate past earnings because of irregularities in its options accounting.

In the Comverse case, the DOJ said it has seized more than $45 million from two investment accounts held in Alexander's name. The seizure was 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. That was part of an effort to conceal the funds from U.S. authorities, the DOJ said.

In addition, the SEC began 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 are scheduled for late today in U.S. District Court for the Eastern District of New York. An arrest warrant has been issued for Alexander, the DOJ said.

The defendants "gave themselves and others an opportunity to place a bet in the middle of a race -- a bet that paid off handsomely," Roslynn R. Mauskopf, U.S. attorney of the Eastern District of New York, said in a statement.

From 1998 through 2001, Comverse adopted stock-option plans designed to provide additional compensation for executives, including the defendants, and other employees, the DOJ said. In the company's proxy statements and other public filings, the defendants said the options would be priced at "fair market value."

However, Alexander, Kreinberg and Sorin fraudulently backdated the options awarded to days when the stock was trading at periodic low points, the DOJ alleged. As a result, the options were granted below the trading price on the date the options were actually granted.

Alexander allegedly gave himself more than 300,000 of those backdated options for a paper profit of over $11 million, the DOJ said.

In addition to the backdating scheme, the complaint also accuses Alexander and Kreinberg of generating 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 company's board of directors.