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What's the Feds Doing About the Crime?
Federal prosecutors
ramped up their attack on alleged stock option
fraud Wednesday, charging that former executives of
a voicemail technology company awarded options to
phantom employees, then shifted those awards to a
"slush fund" to reward favored
workers. More
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What's A Stock Option?
An option is the right
to buy a stock for a set amount -- the exercise
price -- within a certain period of time. Normally,
the exercise price is the stock's market price on
the day the option is granted.
What's Backdating? In a
practice known as backdating, scores of companies
have been suspected of ignoring the actual grant
dates and claiming that the awards were made at
times when their stock prices were at a low point,
thus providing the option recipients with immediate
paper
gains.
Give Me
An Example? O.K, -- for
instance, recently, Comverse executives by
backdating options, "gave themselves and others an
opportunity to place a bet in the middle of a race
-- a bet that paid off handsomely," U.S. Atty.
Roslynn R. Mauskopf
said.
Comverse founder Alexander
has reaped $138 million in stock option gains since
1991, the government said. Of that, at least $6.4
million stemmed from illegal backdating,
prosecutors said. Kreinberg and Sorin have earned
about $1 million each on backdated options, the
government alleges.
The Justice Department case against former
Comverse Technology Inc. executives is the second
criminal filing in the widening options scandal, in
which more than 80 companies -- many of them
California-based technology firms -- have come
under investigation for option
practices.
Most of the focus has been on grants made
during the tech boom of the late 1990s and in its
aftermath. But in their filing Wednesday,
prosecutors allege that former Comverse executives
manipulated options as far back as 1991, raising
new questions about the prevalence and scope of
option abuse.
The allegations that fictitious employees
were created as part of the scheme are particularly
stunning, said James Cox, a law professor at Duke
University. "This is like a page out of Chicago
elections," he said.
In papers filed in federal court in
Brooklyn, N.Y., on Wednesday, the Justice
Department and the Securities and Exchange
Commission alleged that Comverse's founder and
former chief executive, Jacob "Kobi" Alexander,
former Chief Financial Officer David Kreinberg and
former General Counsel William F. Sorin conspired
to "backdate" stock option awards to make them more
lucrative for themselves and for other employees in
the 1990s and early
2000s.
Secret Scheme's? The
secret scheme defrauded Comverse investors because
the true cost of the option awards wasn't reflected
in the New York-based company's financial data. As
a result, Comverse "materially overstated its net
income" from 1991 through at least 2002, the SEC
said.
The Justice Department also
said that it had seized $45 million in two
investment accounts in Alexander's name, and that
he had recently transferred more than $57 million
to accounts in Israel "in an effort to conceal the
funds from U.S.
authorities."
After attempting a cover-up,
the government said, the executives resigned in May
from Comverse, a leading provider of voicemail
systems. Alexander founded the firm in
1984.
The technology industry is a
focus of regulators' backdating probes because
stock options long have been a common form of
compensation for tech executives and rank-and-file
workers.
Part
03 /
What's the solution? In
2005, academic research suggested that many
companies had manipulated option grants by
backdating them. In recent months, as prosecutors
have drilled deeper into option practices, scores
of companies have said they were under
scrutiny.
The criminal case against the ex-Comverse
executives is just the second to stem from the
government's investigation. The first criminal case
was filed against two former officers of San
Jose-based Brocade Communications Systems Inc. on
July 20.
The Brocade executives were charged with
falsifying meeting minutes of a committee of
Brocade's directors to hide option backdating. The
executives also backdated employment-offer letters
and other personnel records for some new employees
so that those employees could get option grants at
attractive prices that predated their actual
employment, prosecutors
alleged.
On Wednesday, a federal magistrate in San
Francisco refused a defense request to dismiss the
case against the pair, who have denied the
charges.
In the Comverse case, the government alleges
that from 1999 to 2002 the executives gave options
to employees who didn't exist. The names of the
fake employees were submitted to Comverse's board
with the names of real employees for option-grant
approval, prosecutors
said.
After the board approved the awards, the
options for the fake employees were transferred to
an internal account under the name "I.M. Fanton,"
which stood for phantom, the government said. That
account name was later changed to "Fargo," they
said.
Alexander then handed out those options to
real employees as he saw fit, without the approval
of Comverse's board, the government
alleged.
On two occasions in 2000, Alexander
transferred a total of 88,000 options from the
slush fund to a "top executive," prosecutors said.
The executive immediately cashed in the options and
sold the stock for a total profit of $4 million,
they said.
Josie
Cory
Publisher/Editor
TVI Magazine
TVI
Magazine, tviNews.net, YES90, Your Easy Search,
Associated Press, Reuters, BBC, LA Times, NY Times,
VRA's D-Diaries, Industry Press Releases, They Said
It, SmartSearch, and Wikipedia, the free
encyclopedia were used in compiling and
ascertaining this Yes90 news
report.
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- 106 Options for Wall Street Scammers - Phony
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