Wednesday, January 30, 2008

Comverse Comes Clean on Kobi, and He Countclaims for $72 Million

Comverse Technology issued the final report (here) on its internal investigation of options backdating and earnings manipulation, blaming the misconduct squarely on its founder and former CEO, Kobi Alexander, and other senior executives.  In 2006, Alexander fled -- or chose to relocate -- to Namibia shortly before his indictment in the Eastern District of New York on conspiracy, securities fraud, and obstruction of justice charges.  According to the company's report:

In reviewing the Company's practices relating to option grants from 1991 through 2005, the Special Committee reviewed 39 separate grants of more than 82 million options to approximately 6,200 employees and consultants, as well as 22 grants of approximately 1.2 million options to eight non-employee directors of the Company. It found that between 1991 and 2001, almost 54 million stock options (issued via 29 grants to 5,386 grantees) were backdated to obtain advantageous exercise prices, with the knowledge and participation of the Company's former Chairman and Chief Executive Officer, Jacob "Kobi" Alexander ("Alexander"), the Company's former director and General Counsel, William Sorin ("Sorin") and, at times, the Company's former Executive Vice President and Chief Financial Officer, David Kreinberg ("Kreinberg"). 

Kreinberg and Sorin earlier entered guilty pleas and settled securities fraud cases filed by the SEC.  The accounting improprieties involved "cookie jar" reserves used to smooth out Comverse's earnings so that they appeared to be less volatile than they were, a major no-no in financial reporting.

Alexander has been living in Windhoek, Namibia's capital, for over eighteen months, and an extradition request by the United States has been repeatedly postponed by the Namibian courts at his request; the next one is scheduled to take place in March, although given past practices it too is likely to be delayed.  One would think Alexander would not want to pick a fight with his former employer in the United States, even after it filed a lawsuit against him in New York state court to recover for the damages he allegedly caused it through the options backdating and accounting problems.  Instead, however, he filed a counter-claim to Comverse's suit, seeking $72 million in severance pay and for options that he claims the company improperly canceled.  Given that the Super Bowl is almost upon us, perhaps this is the "best defense is a good offense" approach.

If one were trying to stay away from the United States, would you file a claim in a state court lawsuit that might subject you to the jurisdiction of an American court and require you to appear for a deposition?  New York's civil discovery provision, CPLR 3110, provides: "Where the deposition is to be taken within the state. A deposition within the state on notice shall be taken: 1. when the person to be examined is a party or an officer, director, member or employee of a party, within the county in which he resides or has an office for the regular transaction of business in person or where the action is pending . . . ."  A party can seek to have a deposition taken outside the state, but it requires a showing of "substantial hardship" in order to avoid appearing in New York. 

Is a federal indictment a "substantial hardship" that might be grounds for Alexander to avoid returning to New York?  I'm certainly not an expert in New York civil procedure, but the few cases I saw on the topic allowing depositions outside the state generally involved issues related to illness or infirmities, or where the person would appear at a time closer to the trial so initial discovery could be taken through written interrogatories or video deposition.  Somehow, I suspect a New York state Supreme Court judge is not going to view a claim that a party wishes to avoid being arrested on federal charges -- even when that person proclaims his innocence -- as meeting the requisite standard to avoid appearing for a deposition, particularly when a counter-claim has been filed.  Even if Alexander is deposed in Windhoek, don't be surprised if the federal prosecutors get ahold of the transcript to use in his trial -- if there ever is one, givenn how well his attorneys are delaying the extradition process in Namibia.  Comverse doesn't appear to harbor any warm feelings for its former CEO these days, so it will look to make the case against him almost as much as the U.S. Attorney's Office will.  A Reuters story (here) discusses Alexander's counterclaim. (ph)

Civil Litigation, Securities | Permalink

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