First senior executive admits options fraud

Listen to this article

00:00
00:00

David Kreinberg, the former chief financial officer of Comverse, the voicemail software company, on Tuesday became the first top executive to plead guilty to conspiracy and securities fraud in connection with options backdating.

The guilty plea, part of a deal struck with federal prosecutors, came as the US Securities and Exchange Commission announced that Mr Kreinberg had agreed to pay almost $2.4m to settle civil fraud charges.

Mr Kreinberg, who has been free on $1m bail since he surrendered to the Federal Bureau of Investigations in August, was one of three former Comverse executives to be charged over backdating.

Jacob “Kobi” Alexander, Comverse’s founder and chief executive, was arrested in Namibia earlier this month after being branded a fugitive from justice by US authorities. Mr Alexander, who has denied wrongdoing, is fighting extradition to the US, where he could face more than 20 years in jail if convicted.

William Sorin, Comverse’s former general counsel, is also facing charges. His lawyers could not be reached for comment on Tuesday.

Mr Kreinberg entered his guilty plea in a federal courtroom in Brooklyn. He told a judge that he “knew at the time that my actions and agreements with others at the company to act as I have were wrong.”

Options-granting practices at more than 150 companies have come under scrutiny in one of Silicon Valley’s biggest scandals since the dotcom collapse, according to Glass Lewis, an institutional shareholder service.

The FBI and securities regulators are examining whether managers intentionally misled shareholders by manipulating the grant dates of stock options in order to inflate their value.

Mr Alexander is alleged to have led a complex scheme to manipulate the grant dates of stock options at Comverse. Among other offences, Mr Alexander is alleged to have created a secret options slush fund by awarding options to fake employees. Mr Alexander has said he plans to fight the charges if brought to trial.

Mr Kreinberg’s guilty plea marked the first concrete legal fallout from the options backdating scandal. Two former top officials from Brocade Communications Systems, a networking equipment maker, have pleaded not guilty to backdating charges.

The SEC said Mr Kreinberg, without admitting or denying wrongdoing, had agreed to pay $2.4m and to accept a permanent ban on serving as a company director or officer.

Although backdating is not in itself illegal, experts say executives who changed the grant dates of stock options without disclosing the practice to shareholders may have fallen foul of securities laws.

Accounting problems arising from the practice have led dozens of companies to announce they will be forced to restate past earnings, some to the tune of billions of dollars.

Forty-five executives and directors have stepped down as a result of backdating, according to Glass Lewis.

Copyright The Financial Times Limited 2017. All rights reserved. You may share using our article tools. Please don't copy articles from FT.com and redistribute by email or post to the web.