Two former executives at Comverse Technology (Nasdaq: CMVT), David Kreinberg and William Sorin, were arrested yesterday by FBI agents. The two are being held on suspicion of involvement, together with company founder Kobi Alexander, in the backdating of options granted by the company. The three men stepped down from their posts at Comverse Technology in May, following the launch of an internal inquiry by the company.
The whereabouts of Alexander are unknown and the FBI has issued a warrant for his arrest and declared him a fugitive. Sorin and Kreinberg appeared in court yesterday and bail was set at $1 million. Alexander, however, failed to appear in court. Speculation as to his whereabouts ranged from Israel to Germany, but the US press appears sure that he is still in the US.
As expected, the US Securities and Exchange Commission (SEC) has filed criminal charges against the three former Comverse Technology executives. “Reuters” quoted US deputy attorney general Paul McNulty as saying that an arrest warrant had been issued for Alexander.
The indictment claims that Alexander, Kreinberg and Sorin gained substantial personal benefit from their fraudulent actions. From 1991 through 2005, Alexander exercised options and sold shares worth approximately $150 million, while recording a profit of approximately $138 million. The SEC said that its preliminary examinations had revealed that $6.4 million of this profit was created by the backdating of allocations.
The “Wall Street Journal” reported that in a separate process, the authorities have sought an order to freeze Kobi Alexander’s bank accounts at a financial institution in New York. The authorities claim that Alexander was involved in recent months in 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.”
More than 80 companies are either under investigation by the US Department of Justice , SEC or both authorities together, or are conducting their own internal reviews of their options policy.
Two days ago, Comverse Technology announced that it would not meet the deadline for filing its financial report and that it had asked Nasdaq for an extension until September 25. If its request is not approved, Comverse Technology is likely to be switched to Nasdaq’s Pink Sheets list.
Other Israeli companies that have recently been mentioned in connection with options backdating are Mercury Interactive Corp. (Pink Sheets:MERQE), M-Systems Flash Disk Pioneers (Nasdaq: FLSH)and Zoran Corp. (Nasdaq: ZRAN).
Backdating is only part of the story at Comverse Technology. The FBI and SEC claim that Alexander, Kreinberg, and Sorin had set up a slush fund, which they used in 1999-2002. Initially called “I.M. Fanton”, inspired by the movie “Phantom of the Opera”, the slush fund’s name was later changed to “Fargo”, after the Coen brothers’ movie of the same name.
Stock options grants allocated to fictitious employees on fictitious dates were deposited in the slush fund. The three men subsequently used these options, which were immediately exercisable, to hire and pay the salaries of key people at Comverse Technology and its subsidiaries. The FBI and SEC allege that Alexander had sole discretion in the granting of these options.
Kreinberg went farther, and showed an employee how to conceal the existence of the slush fund. The indictment states that Alexander also told the people involved not to talk about the fund. Although the slush fund was closed down earlier, when the stock options grants affair erupted in March 2006, Kreinberg realized that he could be implicated in it. He therefore tried to conceal the fund’s existence, and changed records to indicate that the slush fund was closed in 2002, on a date when there was heavy trading in the company’s share. The indictment says that, later, Kreinberg was afraid he’d be caught, and tried to change the dates back to their original dates.
The three men consistently claimed in documents that they submitted to the SEC that the options were granted at the market price on the date of the allocation. That was untrue, and the dates served their personal interests. The indictment cites the date of July 15, 1996, as an example. On that day, 112 individuals received options with a strike price of $23.75 per share, a price set by Alexander, and which was the second lowest price of the share during 1996.
The consent of Comverse Technology directors was obtained by telephone for the options grant, in breach of the company’s bylaws, which stipulate that a majority of directors must approve stock option grants at a board meeting. The options grant was recorded in the system only two months later, on September 10, when Comverse Technology’s share price was $36.50. In other words, Alexander made an immediate profit on September 10 of $1.3 million, Kreinberg made a profit of $227,000, and Sorin $128,000.
In a second case in 1999, the three men set a strike price that was $35 less than Comverse Technology’s share price on that date, which gave Alexander a profit of $11 million.
There were 26 examples of backdating, generating a profit of $140 million. The question that you are undoubtedly asking yourselves is, “Why on Earth did he do it?”
Published by Globes [online], Israel business news - www.globes.co.il - on August 10, 2006
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