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.
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.
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. In a practice known as backdating, scores of companies are 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.
By backdating options, the Comverse executives "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 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.
Attorneys for Alexander and Sorin did not return phone calls. Kreinberg's attorney had no comment.
Sorin, 56, and Kreinberg, 41, appeared in court Wednesday to be formally charged. The government said an arrest warrant had been issued for the 54-year-old Alexander, a dual citizen of the U.S. and Israel, whose whereabouts were not immediately known.
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.
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.