Thursday, August 10, 2006

Charges Filed in Comverse Probe (from the WSJ)

Yesterday, I posted a link to this list of securities class-action suits against firms suspected of backdating their options. Then today I read in the Wall Street Journal that Comverse Technologies (ticker: CMVT) has had federal charges filed against it. According to the article,
The 50-page affidavit and a related civil complaint filed by the Securities and Exchange Commission offer an unusually detailed account of how a blatant backdating scheme allegedly went on for years in the top ranks of a large corporation. The SEC alleged that Mr. Alexander looked back at Comverse's past stock trading and cherry-picked dates for the options grants when the price was low, making the options more valuable. Mr. Sorin then allegedly misled members of the board compensation committee by getting them to sign paperwork with the prior grant dates already filled out, the government charged.
Read the whole thing here (note: online subscription required).

The story is interesting. It started unraveling with a phone call from a WSJ reporter asking why the company's options always seemed to be granted at low points. Then the frantic cover-up began:
Their actions allegedly included lying to a company lawyer, misleading auditors and attempting to alter computer records to hide a secret options-related slush fund, originally nicknamed "I.M. Fanton." It wasn't until a dramatic series of confessions later in March, the affidavit said, that the executives admitted having backdated options. The trio resigned in May.
I note that they did a pretty good job of fooling the compensation committee (although it didn't seem too hard). It might make for a good research project to look at the compensation committees of other firms that are under investigation. Since the committee signs off on the grants, backdating requires its members to be either incompetent or unethical (or both). Either way, a backdating represents a major governance failure. So, looking at these committees might make for an interesting project.

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