Three former top executives at Comverse Technology have been charged in a scheme to manipulate stock options, U.S. authorities said yesterday.
A criminal complaint unsealed in federal court in Brooklyn alleges that former CEO and founder Kobi Alexander, former finance chief David Kreinberg, and former senior general counsel William Sorin conspired to manipulate stock options by falsifying the dates on which they were granted.
Kreinberg and Sorin surrendered yesterday morning to the FBI, authorities said. Alexander's whereabouts were unknown, they added. A source familiar with the case told the Bloomberg wire service that Alexander has been declared a fugitive.
The three resigned their positions at the company after an internal review found that the options allocation process had been improper. In mid-March, Comverse suddenly postponed publication of its fourth-quarter results, and announced the appointment of a commission to review the options. A few days later, a Wall Street Journal investigative report found that the chances Alexander received options on random dates were close to zero.
Alexander, Kreinberg and Sorin are likely to devote the lion's share of the next several years to legal entanglements. Attorney Adam Klein, a partner at Goldfarb, Levy, Eran, Meiri, told TheMarker recently that if the court finds they intentionally violated the law - that is, they knew about the changes to the allocation dates - they will be convicted of crimes that could carry a range of sentences, from fines and community service to jail time.
"Signing the clauses stipulated in the Sarbanes-Oxley Act means they carry more personal responsibility than in the past, which means they face heavier sentences if convicted," Klein said at the time.
"The defendants reaped substantial personal gain from their fraudulent conduct," according to the criminal complaint. "From 1991 through 2005, Alexander exercised options and sold stocks worth approximately $150 million, of which approximately $138 million was profit.
"Preliminary analysis shows that almost $6.4 million of that profit was due to backdating," the complaint said.
A call to Alexander's lawyer, Robert Morvillo, was not immediately returned. Morvillo specializes in white-collar crime, and defended businesswoman Martha Stewart. Morvillo said last week that the Comverse case should never have been a criminal investigation, and should have been handled entirely by the SEC as purely a civil matter.
"Alexander and Kreinberg used fictitious names to generate hundreds of thousands of backdated options, which they then parked in a secret slush fund," the complaint said. "Alexander unilaterally awarded options from the slush fund to favored employees."
Kreinberg falsified documents to hide the slush fund from an outside auditor, the complaint said.
Alexander is suspected of wiring $60 million to Israel from proceeds of fraudulent stock options, Bloomberg quoted prosecutors as saying.
More than 80 companies are either under federal investigation by the U.S. Justice Department, SEC, or both, or have started internal reviews of possible manipulation of options grants to increase their value to recipients.
Under backdating, insiders try to make the rewards more lucrative by pinning the option's exercise price to a low point in the stock's value.
If companies backdate options without accounting for the move, it can cause profits to be overstated and taxes to be underpaid. The financial manipulation also exposes companies to possible fraud charges.
The U.S. Justice Department has already brought criminal charges against Brocade Communications' former CEO, Gregory Reyes, and is actively investigating other cases. Reyes is free on a $2 million bond.
Comverse recently said it is preparing restatements for five years of financial reports.
Alexander made most of his estimated $250 million fortune from exercising options in Comverse and subsidiaries Verint and Ulticom. When the scandal broke, he held a little over 2 percent of Comverse, however, he has been prohibited from conducting transactions in company shares or options.