Three Former Comverse Executives Charged in Options-Timing Case

Three former senior executives of Comverse Technology, Inc., CEO Kobi Alexander, CFO David Kreinberg, and chief legal counsel William Sorin, have been charged with conspiracy to commit securities, mail, and wire fraud in a criminal complaint filed in the Eastern District of New York (Brooklyn).  The charge relates to backdating options by the former executives, including an alleged "slush fund" options account in the name of a fictitious employee -- nicknamed after Phantom of the Opera -- to park options that could be doled out to attract employees.  According to the complaint (here -- courtesy of the Wall Street Journal Law Blog), each of the defendants received backdated options that permitted Alexander to reap additional gains of $6.4 million, and Kreinberg and Sorin over $1 million each. 

An interesting aspect of the complaint is the lengthy recitation of efforts by the three executives to slow down the company's internal investigation and to make false responses to a Wall Street Journal reporter inquiring about the timing of the options grants that triggered the entire investigation.  According to the complaint, the defendants tried to dissuade a corporate lawyer from hiring outside counsel to investigate the options-timing issue, and that Sorin's responses were "half-truths" and vague.  What is not clear from the complaint is how these acts relate to the conspiracy, which involved filing false statements with the SEC and defrauding the company's shareholders.  The alleged acts may go to show guilty knowledge, but it is not a separate crime to lie to a reporter -- even one from the Journal -- nor are false statements in an internal investigation illegal in themselves.  It is possible that prosecutors could obstruction of justice to the conspiracy (or as a separate charge) in a subsequent indictment, similar to what was charged in the Computer Associates case that included misleading conduct directed at lawyers doing the internal investigation.  Whether such a charge is permissible, even under the broader obstruction statute adopted in the Sarbanes-Oxley Act (18 U.S.C. Sec. 1519), is an open question. 

It is clear that Comverse cooperated in the criminal investigation, including waiving its attorney-client privilege, because the complaint recounts in detail conversations between corporate counsel and one or more defendants.  Such waivers have been heavily criticized recently, but in this case it was clearly in the company's interest to waive the privilege, although prosecutors may have demanded it early on.  It will be interesting to see if any of the defendants assert that Comverse was pressured into waiving its attorney-client privilege to avoid charges against the company, and seek to have those conversations suppressed.

This is the second criminal case to come out of the various options-timing investigations.  Similar to the charge against two former executives of Brocade Communications (see earlier post here), the government chose to proceed with a criminal complaint rather than an indictment, although it is not clear why.  Kreinberg and Sorin surrendered, but to this point Alexander has not, and an AP story (here) notes that prosecutors fear he may not be in the country.  Unlike the Brocade case, the Comverse defendants received a portion of the backdated stock options, so it may be easier to prove their intent if a securities fraud count is added to the case. 

Finally, in an effort to show Alexander's knowledge of the company's filings, the complaint quotes him as stating once to an employee, "How many CEOs do you know who read every word of the footnotes?"  That probably puts the "honest-but-ignorant CEO" defense out of reach. (ph)