Risk Management

Comverse’s Alexander: Backdating Not a Crime

Living in Africa and awaiting an extradition hearing, the ex-CEO of Comverse speaks out about his former company's alleged backdating scandal.
Stephen TaubJune 27, 2007

Jacob Alexander, the founder and former chief executive officer of Comverse Technology asserts that backdating stock options is not illegal. He also explains that he relied on the advice of experts such as lawyers and accountants regarding his former company’s options awards, according to his lawyers, reported Bloomberg. “Backdating options is not illegal. Alexander relied on lawyers and accountants to draft Comverse’s disclosures and to prepare its financial statements,” noted the wire service.

Alexander is currently living in Namibia, free on bail after being arrested last September. U.S. law enforcement officials are seeking his extradition to face 35 criminal counts. A recent extradition hearing was postponed until July 9 after Alexander appointed two lawyers from South Africa who didn’t have work permits to practice in Namibia, said Bloomberg. Alexander’s lawyers noted that “The charges relate to the disclosure and accounting treatment of the options,” noted Bloomberg.

The attorneys compared the case to that of Apple’s chief executive Steve Jobs, who was cleared by the Securities and Exchange Commission of backdating, added Bloomberg. “Alexander is neither a lawyer nor an accountant,” reiterated the attorneys.

Drive Business Strategy and Growth

Drive Business Strategy and Growth

Learn how NetSuite Financial Management allows you to quickly and easily model what-if scenarios and generate reports.

In May, William F. Sorin, former general counsel of Comverse, became the first executive involved in the stock-option backdating scandal to be sentenced to prison. Sorin, who last November pleaded guilty to a single criminal count of conspiracy to commit securities fraud, mail fraud, and wire fraud, was sentenced to one year and one day in prison, plus three years’ supervised release. He is scheduled to report to prison on August 15.

Last July, CFO.com reported that there is no statute that explicitly outlaws backdating stock-option grants. However, based on the first case brought by the Department of Justice and the SEC against two Brocade Communications Systems executives, it seemed virtually impossible to backdate options and achieve the ultimate goal of putting grants “in the money” without first deliberately falsifying documents and then covering up the sham—one definition of accounting fraud.

Last month, the SEC settled separate civil fraud charges with Brocade and Mercury Interactive, two of the earliest companies to be embroiled in the stock options backdating scandal. The settlements included the first fines to stem from such cases—$28 million for Mercury Interactive and $7 million for Brocade.

In the Brocade case, the SEC said that the company committed fraud through the actions of former CEO Gregory L. Reyes and other former executives, who repeatedly granted backdated stock options, misstated compensation expenses, and concealed the conduct by falsifying reported income from 1999 through 2004. The SEC said that Reyes routinely provided extra compensation to employees by granting valuable in-the-money stock options for which a financial statement expense was required.

To avoid reporting to investors the hundreds of millions of dollars in undisclosed compensation expenses, Brocade’s former executives allegedly concealed the fact that the options had been granted in-the-money by creating records to make it falsely appear that the options had been granted at a lower price on an earlier date, said the regulator.

In the case of Mercury Interactive, acquired by Hewlett-Packard last November, the SEC also charged four former senior officers of the company: former chairman and CEO Amnon Landan, CFOs Sharlene Abrams and Douglas Smith, and general counsel Susan Skaer. The commission alleged that Mercury Interactive and the former executives “perpetrated a fraudulent and deceptive scheme” from 1997 to 2005 to award themselves and other employees undisclosed, secret compensation by backdating stock-option grants, failing to record hundreds of millions of dollars of compensation expense, and falsifying documents to further this scheme.

Through Landan, and at times Abrams, Smith, or Skaer, the SEC charged that Mercury also made fraudulent disclosures concerning Mercury’s “backlog” of sales revenues to manage its reported earnings, and structured fraudulent loans for option exercises by overseas employees to avoid recording expenses.

4 Powerful Communication Strategies for Your Next Board Meeting