Financial ServicesOptions ChargesLiz Moyer, 08.09.06, 1:40 PM ET (from Forbes.com)The ex-CEO of Comverse Technology arranged a secret slush fund of stock options by directing grants to "phantom" employees in a special account set up for the purpose, according to federal prosecutors.
The U.S. Justice Department and the Securities and Exchange Commission said Wednesday that the slush fund was part of an elaborate fraud carried out by three former senior executives of Comverse , including former CEO and founder Jacob "Kobi" Alexander.
Options amassed in the secret account were doled out to real employees without the approval of the board's compensation committee, the government contends. In addition, Alexander and his finance chief allegedly tried to conceal the slush fund from the board and from the company's outside auditors.
The Justice Department says Alexander wired $60 million from his own brokerage account to Israel "in an attempt to conceal the proceeds from the U.S. authorities."
An attorney for Alexander couldn't immediately be reached.
The government has charged Alexander, along with Comverse's former finance chief David Kreinberg and former general counsel William Sorin, with various counts of fraud, including mail and wire fraud, in connection with its ongoing investigation into the backdating of options grants.
The U.S. Attorney for the Eastern District of New York says the three conspired to manipulate and deceive Comverse investors. Among the allegations: Options grants to new employees were routinely backdated, and underwater options to existing employees were repriced to put them in the money.
Kreinberg and Sorin surrendered to the Federal Bureau of Investigation Wednesday. Alexander is believed to be out of the country, a person familiar with the matter said.
This is the government's second series of charges filed against former executives in connection with options backdating. Last month, the Justice Department brought charges against former executives of Brocade Communications Systems, including its ex-CEO Gregory Reyes.
The Securities and Exchange Commission also filed a complaint against the three Comverse executives on Wednesday. In the Brocade case, the SEC also announced charges on the same day as the Justice Department.
Comverse, a New York-based voicemail and voice messaging systems firm, was founded by Alexander in the 1980s. The U.S. Attorney charges that the men devised a scheme to backdate millions of stock options granted to themselves and their employees to days when Comverse stock was trading at periodic lows.
"[The] defendants backdated every companywide grant from 1998 to 2001, and they backdated grants of options to new employees," according to an affidavit submitted to the federal District Court in Brooklyn.
Alexander's profits from exercising options and selling stock from 1991 to 2005 were $138 million. The Justice Department says $6.4 million of that profit was due to backdated options. In 2000, Alexander made profits of $86 million, of which $1.3 million was from backdating, the government charges. Last year and early this year, Alexander exercised $11 million worth of backdated options that were previously underwater until they were repriced. The charges contend that about $5.3 million of that amount was profit.
The government is looking into options grants at more than 80 companies, and several large firms have said in recent months that they were conducting their own internal investigations.
Last week, Apple Computer said it would have to restate earnings after finding irregularities in its options accounting. Pixar, now owned by The Walt Disney Co., unveiled issues with its options accounting this week, though Disney said Wednesday that it didn't expect the problems to have any material impact on the company, and that the practices took place before it took control of the company.
With additional reporting by Hannah Clark.
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