Filings Allege Tactics to Hide Backdating of Stock Options

How can company executives hide a stock option backdating scheme from directors, auditors and investors?

The government’s criminal and civil complaints filed last week against three former executives of Comverse Technology Inc., offer possible answers, detailing how the trio allegedly engaged in a concerted scheme of deceit to avoid detection.

Option grants must be approved by corporate directors. In the case of Comverse, directors on the board’s compensation committee were faxed approval forms that showed option grants on dates that management had secretly chosen because share prices were at a recent low, the government claims.

The directors, according to prosecutors, just assumed that they were approving options to be priced on the day that they gave their OK, and that there wouldn’t be any difference between that price and what they saw on the forms.

The government also alleges that the executives duped directors into approving options for imaginary employees, so that those options later could be transferred to a slush fund.

The phony names were interspersed with names of real employees in grant-approval forms, prosecutors say. The option awards were for 5,000 shares each -- small enough amounts “that would not attract the [directors’] attention,” the Justice Department complaint says.

Auditors couldn’t check what they couldn’t see: The executives removed the phantom accounts from an option tally that Comverse’s auditors requested for 2001, the government says.

Also in 2001, two big shareholders wanted written assurance that Comverse would only issue options under standard rules, meaning that the purchase, or exercise, price would never be at a discount to the stock’s price on the day of a grant, according to court papers. The investors, who weren’t identified, wanted that assurance before voting in favor of management’s 2001 option-grant plan.

The executives, prosecutors say, simply lied in letters to the investors, telling them what they wanted to hear even though the executives “intended to continue” to backdate options.

Lawyers for the executives -- former Chief Executive Jacob Alexander, former Chief Financial Officer David Kreinberg and former General Counsel William F. Sorin -- have not commented.

If the allegations are true, what they show is that no level of regulation or oversight may be enough to stop someone who is intent on finding a way around the law, attorneys say.

“If somebody really wants to commit fraud, they can do it,” said Barry Barbash, a securities law expert at Wilkie Farr & Gallagher in Washington.