Options Backdating Case

The Pomerantz Firm announced in December that Comverse Technology, Inc. ("Comverse") and its founder and former CEO, Jacob "Kobi" Alexander, had agreed to settle the securities class action filed against them for $225 million. Comverse will contribute $165 million to the settlement and Alexander will contribute $60 million. The settlement constitutes the second largest recovery ever for shareholders alleging securities fraud claims related to options backdating. Patrick Dahlstrom, a Pomerantz partner and lead attorney representing the plaintiffs, stated, "We are very proud to have achieved this settlement, which represents a substantial recovery of damages incurred by the class."

Lead plaintiffs Menora Insurance Co., Ltd. and Mivtachim Pension Funds Ltd. (the "Menora Group"), an Israeli-based insurance company and pension fund, alleged in its suit that the company's compensation committee routinely approved grants of undated and backdated options to Comverse employees, including senior management. Unbeknownst to investors, the company's executives were retroactively "cherry picking" dates when the stock closed at its lowest and falsely claiming that the options were granted on those dates. The exercise prices for the backdated options were thereby based on the stock closing price on the cherry-picked dates. Because the options were actually granted on dates when the market price was higher, backdating placed the options "in the money" the instant they were granted. In some cases, according to the complaint, such grants were made to fictitious employees in order to create a slush fund of backdated options for management to dole out as it pleased, often to lure new recruits with extra compensation incentives.

While the law does not explicitly forbid the backdating of options, it does require corporations that engage in this practice to record, as expenses, the difference between the exercise prices on the actual grant date and the phony grant date. However, by backdating the options, Comverse made it appear that the options were granted at the prevailing market price and that no compensation expense needed to be recognized.
Investors suffered huge losses when Comverse disclosed its backdating scheme in March and April 2006. The company's common stock price dropped 20 percent on the heels of the two announcements. In response to the disclosures, Comverse's Board of Directors convened a Special Committee to review internal controls related to the option grants and investigate any accounting violations related to the failure to expense the option grants. During the investigation, the Special Committee uncovered additional accounting violations for errors in the recognition of revenues, the misclassification of expenses, and the recording of certain deferred tax accounts. Ultimately, the company disclosed that it would need to restate its financials for fiscal years 2001 through 2005 and the first three cial Committee filed a Report of its findings from the investigation with the Securities and Exchange Commission.

After the initial complaints in the action were filed, the three main perpetrators of the fraud - CEO Kobi Alexander, CFO David Kreinberg, and General Counsel William F. Sorin - were indicted by the United States Department of Justice. Rather than surrender to the United States Attorney, as he had agreed to do, Kobi Alexander fled the country and surfaced months later in Namibia, where he currently is fighting extradition and is a fugitive from United States justice. Sorin pled guilty to securities fraud and was sentenced to a year and a day in prison, and paid a fine to the Securities and Exchange Commission. Kreinberg has not yet been sentenced for his criminal violations, but has also paid a fine to the Securities and Exchange Commission.

As part of the settlement, Kobi Alexander has agreed to pay $60 million to settle the class's claims. This constitutes one of the largest recoveries ever made in a federal securities action by an individual defendant. Indeed, the recovery from Alexander is twice that recovered from the CEO in the largest options-backdating case.

Currently, the Settlement and the Plan of Allocation, which establishes the basis for distributing the settlement proceeds to individual Class members, have been submitted to the Court for its approval. The Plan of Allocation affords a recognized loss of $12.47 per share for those shares purchased during the Class Period and held through January 29, 2008, the date the Special Committee Report was filed with the SEC. The Settlement and Plan of Allocation are subject to final approval by the Court after a "fairness hearing," at which time Class members can voice their opinions on the proposed settlement and plan of allocation. A date for the fairness hearing has not yet been set by the Court.