Department of Justice Seal

Transcript of Press Conference Regarding the Indictment of Three Former Comverse Technology Inc. Executives

Washington, D.C.

MR. MCNULTY: Good afternoon. I’m Paul McNulty, the Deputy Attorney General, and I am joined on this stage by Roslynn Mauskopf, the United States Attorney for the Eastern District of New York; Chip Burrus, who is the Assistant Director of the Criminal Division for the FBI; and Linda Thomsen, who is the director of enforcement for the Securities and Exchange Commission.

Today, in Brooklyn the federal courthouse for the Eastern District of New York, the Department of Justice unsealed a complaint charging three, former-senior officers of Comverse Technology, Inc. with conspiring to violate our nation’s securities laws and to commit mail and wire fraud. Those charged are Jacob “Kobi” Alexander, David Kreinberg, and William F. Sorin.

Mr. Alexander is Comverse’s founder, former CEO, and former chairman of the board. He had an active role in preparing and signing the company’s quarterly and annual securities filings. Mr. Kreinberg is Comverse’s former CFO, and was responsible for the corporation’s annual and quarterly securities filings, and Mr. Sorin is Comverse’s former general counsel and corporate secretary, and in those duties signed Comverse’s annual securities filings and proxy statements.

The criminal complaint outlines a broad-ranging scheme to defraud the investing public through the improper granting of stock options for Comverse’s stock. Through that scheme, the three defendants repeatedly ensured that they and others at the corporation received the option to buy stock at prices well below the stock’s market price, in violation of the company’s shareholder-approved, stock-option plans.

As just one example, in the fall of 2001, the defendants caused options to be granted to themselves and others to buy stock at the share price in effect on October 22, 2001. That date happened to be the second-lowest share price in all of 2001, yet the board’s compensation committee did not approve the grants until November 28, 2001, at the earliest, when the share price had risen nearly $5 per share. As a result, Alexander received options worth approximately $3 million, Kreinberg received options worth $625,000, and Sorin received options worth $135,000.

At the same time, the defendants repeatedly, falsely indicated with their statements to shareholders and the investing public that it was company practice to grant options only at the prevailing market price. They conducted this scheme by routinely creating false paperwork that showed the options having been granted on dates earlier than the actual dates, a practice known as backdating. Unsurprisingly, given the perfect vision of hindsight, these early dates consistently coincided with dates when the stock was at a low point, ensuring that the options had substantial value when actually granted.

In addition, defendants Alexander and Kreinberg participated in the creation of an options slush fund that allowed Alexander to award options to favored employees without the knowledge or consent of the compensation committee and without appropriate disclosure to the investing public. These options, too, were often backdated, in violation of company policy and statements to the investing public.

Today’s action seeks to bring those responsible for these practices to direct account. In addition to criminal charges, the Department has also initiated action to freeze bank accounts worth $45 million, used to launder the proceeds of the scheme, and it has initiated forfeiture proceedings. The criminal charges brought today are only an allegation, of course. All defendants are presumed innocent until proven guilty beyond a reasonable doubt in a court of law.

Stock options can be a valuable tool for compensating employees. When used appropriately and honestly disclosed, they can ensure that employees have a direct incentive to improve the business and its share price, benefiting the company’s shareholders. But when options are backdated to a time when the share price was lower, and without honest disclosure, those options are simply theft from shareholders. The employee gets something of value without taking any steps to improve the company, and without the shareholder ever knowing that the compensation has been paid. Those who engage in such practices must be held responsible.

Now this is not a new effort. A little over four years ago, the President created the Corporate Fraud Task Force as one piece of a multipart initiative to return transparency, accountability, and integrity to our markets. And since that time, the Justice Department has criminally prosecuted more than 1,000 defendants for corporate fraud, including nearly 170 CEOs and corporate presidents, more than 30 CFOs, and nearly 20 corporate counsel.

Other actions by the SEC and by the Congress have also done much to improve corporate accountability. Yet where large sums are at stake, there will always be those who will be tempted to ignore the rules and abuse their positions for their own benefit. Thus we must remain diligent to maintain our hard-won gains in improving our markets.

Investor confidence is critical to our markets, and honesty in corporate leadership is critical to that confidence. Thus the Department of Justice remains steadfast in its determination to hold to account those who violate the investing public’s trust. Today’s action is simply the latest demonstration of that ongoing but essential effort.

I want to thank, in particular, Roslynn Mauskopf’s team in Eastern Virginia (sic), including Ilene Jaroslaw, Linda Lacewell, Sean Casey, Kathleen Nanden. These Assistant United States Attorneys have worked with her in bringing this case, along with many others at the FBI and at the SEC. And I’d like now to recognize Chip Burrus from the FBI to make a statement. Chip.

MR. BURRUS: Thank you, Paul. Thank you, Paul; thank you, Roslynn, and thank you, Linda, for your leadership and fortitude in attacking the deceitful abused of corporate power as we see here today.

Today’s complaint represents yet another in a sad, continuing parade of ruined lives and shattered corporations. Since the formation of the President’s Corporate Fraud Task Force in 2002, the FBI and its partners have convicted more than 400 people in a variety of fraud schemes. Right now there are more than 260 FBI agents working on 420 corporate-fraud and securities-fraud cases to protect the investing public.

This includes 45 instances of backdated stock options, the newest trend in investor-fleecing. Backdated stock options is such an innocent-sounding name, but it’s the corporate equivalent of placing a bet after the race has been run.

In what can only be called an abuse of corporate power, these executives, through fraud and deceit, rewarded themselves and their friends, at the expense of the investing public. Mr. Alexander is alleged to have used the scheme to steal $6 million from the corporation. Kreinberg and Sorin also allegedly each netted a million dollars each. Mr. Kreinberg and Mr. Sorin both turned themselves in to the FBI early this morning.

By fraudulently backdating these options and not reporting the awards, the defendants deceived the investing public. They created a slush fund that was used to secretly reward corporate insiders, in one instance netting an executive $4 million in instant profit.

Comverse, a billion dollar publicly traded company and its shareholders were plundered by these modern-day pirates and they must be held accountable. And they will be held accountable in the court of law.

I want to congratulate the men and women of the New York’s FBI office who have been working on this case: the prosecutors, the Department of Justice, and the dedicated employees of the Securities and Exchange Commission. Andy Arena and David Chavez in particular worked very hard on this case, and they’re here to talk to you, perhaps, afterwards, about the investigation, should you so desire.

I’d like to now introduce Linda Thomsen, but before I go, I want to tell you this is a very strong partnership of the FBI, the Department of Justice dedicated prosecutors, and the Securities and Exchange Commission. We’re not going to quit. Linda.

MS. THOMSEN: Thank you, Chip. Good afternoon, everyone. First, I’d like to commend the Deputy Attorney General and everyone at the Department of Justice, especially the team for the United States Attorney’s Office for the Eastern District of New York and the Federal Bureau of Investigation who are responsible for the criminal case the Deputy Attorney General just announced.

I’d also like to echo the remarks about the President’s Corporate Fraud Task Force. The Securities and Exchange Commission is a proud member of that taskforce and it has been our privilege to work with the other members, especially the Department of Justice, U.S. Attorney’s Offices throughout the country, and the Federal Bureau of Investigation, to make sure that corporate fraud is pursued and effectively addressed.

Today’s actions, as have been noted, are part of that effort. Today, the Securities and Exchange Commission filed civil, fraud charges against Jacob Alexander, former chairman and chief executive officer of Comverse Technology, Incorporated; David Kreinberg, Comverse’s former chief financial officer; and William Sorin, Comverse’s former general counsel. Our complaint, the result of an intensive, five-month investigation, alleges that each of them took part in a decade-long fraud. Their scheme, we allege, was designed to give themselves and others undisclosed, in-the-money stock options by backdating stock-option grants to coincide with historically low closing prices of Comverse common stock.

The complaint alleges, among other things, that between 1999 and 2000, Misters Alexander and Kreinberg created a slush fund of backdated options. They directed that options be granted to fictitious employees and later used these options, some of which were immediately exercisable, to recruit and retain personnel.

Each of the former executives realized substantial personal gains from the exercise of illegally backdated option grants and the subsequent sale of Comverse common stock. Collectively they realized millions. Mr. Alexander realized at least $138 million in gain from the exercise and sale of backdated options. At least $6.4 million of that personal gain represents the undisclosed, in-the-money portion of those grants at the time of the grants. For Mr. Kreinberg, the personal gain is over $13 million, of which, at least $1 million represents the in-the-money portion of the grants. And for Mr. Sorin, the gain is of $14 million, of which approximately $1 million represents the in-the-money portion.

According to the SEC’s complaint, in the decade between 1991 and 2001, Mr. Alexander repeatedly used hindsight to select a date when the closing price of Comverse’s common stock was at or near a quarterly or annual low. Mr. Alexander later communicated this date and closing price to Mr. Sorin, the general counsel, in order for it to be used as the date of an exercised price for a grant of converse options. Mr. Sorin, with Mr. Alexander’s knowledge, created company records that falsely indicated a committee of Comverse’s board of directors had actually approved the option grant on the date Mr. Alexander had cherry-picked, when, in fact, the committee had not acted and did not act until a later date.

Mr. Kreinberg joined the scheme no later than 1998 and assisted Mr. Alexander in selecting grant dates, which coincided with historically low share prices for Comverse stock. The complaint alleges Mr. Kreinberg knew that the company records reflected false grant dates. The complaint also alleges that Mr. Kreinberg, with Mr. Sorin’s knowledge, initiated a similar backdating scheme at AltCom, Inc., a publicly traded, majority-owned subsidiary of Comverse. Both Comverse and AltCom have publicly announced that they expect to restate their historical financial results for multiple years.

As we have said before, we will pursue fraudulent conduct related to stock options wherever and whenever it occurs. Today’s action, the result of a five-month investigation, which is continuing, is another example of our commitment. It also reflects the dedication and commitment of our investigative team, led by Antonia Sheehan and Christopher Cante.

Thank you very much, and now I give the podium back to Mr. McNulty.

MR. MCNULTY: Thank you, Linda. And I’ll take any questions you might have. Yes.

QUESTION: I’m just wondering -- this is your second case now in backdating -- if you guys have a handle on what’s the scope of the problem here, and is this yet another scandal that is facing corporate America?

MR. MCNULTY: Well, we do have a significant number. I’m not going to try to pin it down precisely, but we do have a significant number of investigations going on. Both the SEC and the Department of Justice have significant number of investigations. It remains to be seen how many of those investigations will result in individuals being charged, and I don’t want to speculate on that either. We’ll have to see.

But the fact that there are a significant number of investigations indicates that this is a problem that is extensive that has -- is receiving a great deal of attention from the enforcement community. And I expect that there will be more accountability down the road in this area. Yes.

QUESTION: In the press materials it mentions that there’s $57 million that was transferred to accounts in Israel. Is there any way of freezing that money or can you tell me what might be happening to that money?

MR. MCNULTY: I actually don’t know if there’s any ability to get at the money there. If either one of you do, if you want to say something, also.

MS. MAUSKOPF: As we indicate, we have been using every tool at our disposal to try and trace money related to the fraud alleged in this complaint. $45 million has been frozen here in the United States. We are aware of other monies and are continuing our investigation to ensure that we can freeze and, where lawfully appropriate, recoup the gains from this fraud.

QUESTION: Do you all know where Mr. Alexander is and how close are you to apprehending him?

MR. MCNULTY: I’m not going to comment today on his whereabouts. The other two defendants have surrendered themselves, and we are in the process of getting a hold of Mr. Alexander, but I won’t say anything more than that.

QUESTION: Could you tell us whether he’s in the United States?

MR. MCNULTY: I’m not going to common on that.

QUESTION: Back to the scope of the problem, the number that’s been reported is about 80, the stock backdating investigations, is that a good universe? And, secondly, a long history of those big investigations with ENRON and WorldCom -- was it a surprise to you that you found this massive fraud, another way for corporate executives to enrich themselves after all the titans of industry claim that they’ve cleaned up their accounting practices?

MR. MCNULTY: Well, a number of these offenses, as you can see in this case, actually occurred some time ago. And there is something to be said about that pattern where the actions occur at one time but perhaps change as a result of new reporting requirements to the SEC, and then there’s been a lot of restatements, which have brought this to the attention -- it’s come to the attention of law enforcement in different ways, actually, but that certainly the restatements have been one way that this has led to a number of investigations.

On your original question about numbers. I think that number sounds like it might be actually a combination of both numbers that you have used.

MS. THOMSON: That is a number a number that the SEC has announced of civil investigations, and that number is still good.

QUESTION: Has a grand jury indicted these men?

MR. MCNULTY: This is a complaint that we have today and an indictment would follow, subsequent to an actual complaint.

QUESTION: So have they been officially charged?

MR. MCNULTY: Yes, they have been officially charged by way of this complaint, through a criminal complaint. Yes.

QUESTION: A question for Linda. How much money are you seeking in disgorgement from these three men? Is it $138 million for Mr. Alexander or just the $6.4 million?

MS. THOMSEN: We will seek all available disgorgement, and that will be developed during the course of the case.

QUESTION: So it depends? We’re not quite sure yet?

MS. THOMSEN: We will seek as much disgorgement as we can legally get for the conduct.

QUESTION: Up to a maximum of $138 million?

MS. THOMSEN: I think we have to see where -- how the facts play out in terms of the options that were granted and exercised, any other options that may be other benefits, perhaps compensation in addition to options. So the number will subject to the proof and evidence as we go forward with the case, but we are seeking as much disgorgement as we lawfully can.

QUESTION: Some surveys suggest that 17 percent of public companies have some problem with backdating. Do you have a sense of how many of those are criminal type of problems or are there just sort of legitimate mistakes that can be made?

MR. MCNULTY: I wouldn’t venture to identify a percentage, but I will acknowledge that within all of the cases or incidents involving backdating there’s going to be a variety of factual circumstances and that’s going to affect whether or not the government has a case that can go forward. Some may include mistakes that were made, sloppiness in paperwork, where there isn’t evidence of an intent to actually deceive the shareholders, the board, the investing public. Others are going to show, again, that kind of intent. There is going to be clear evidence of what was being done in order to take advantage of low points in the stock-price value and so forth. So it’s going to be determined by the facts of the case, but it’s clear that some of what may be called a backdating issue may not in fact result in any criminal prosecution.

QUESTION: Have you looked at any cases where you’ve looked into the backdating and there hasn’t been the intent of fraud and you’ve closed cases?

MR. MCNULTY: The answer, I guess, is yes because we’re looking at a lot of cases, and some are being pursued and others are not being pursued as aggressively or don’t seem to be heading in a path where there might be charges brought. So I don’t have a sense of how many we could call closed cases, but based on the information I’m gathering from the field and what folks are doing in their investigations, they’re certainly identifying some cases that have a stronger body of evidence to suggest that there was a clear criminal intent.

QUESTION: Have IRS agents been included in the investigation with regard to the -- tax accounting for the options?

MR. MCNULTY: Yes, we are working with IRS in this matter because you’re right; there are certainly significant tax implications to these cases. And, as you know, the IRS is on the Corporate Fraud Task Force.

We actually met, the Corporate Fraud Task Force did, two weeks ago, discussed this at some length, and talked about the way in which it’s important to coordinate closely with the IRS. And each case will differ a bit as to how involved the IRS will be.

In this case, have you had the IRS involved yet in the investigation?

MS. MAUSKOPF: We’ve had some involvement.

MR. MCNULTY: Yeah, we’ve had -- we’re going to have the IRS in this case, as well, but we’ll see where that goes.

QUESTION: Mr. McNulty, on another topic: There’s reports that one of the eleven missing Egyptian students has been arrested. Do you have any more information on that?

MR. MCNULTY: I don’t have any more information on that particular individual. What I can tell is just, the FBI has said and Immigration and Customs Enforcement has said that they’re attempting to locate all of the Egyptian students that arrived and determine not only obviously their whereabouts but their reason for being here.

But there is no indication that there is any threat associated with their presence. But there is an active effort, an energetic effort, to identify where they are.

QUESTION: So you don’t have any more information on that?

MR. MCNULTY: I don’t have any more information on this individual, no.

QUESTION: How concerned are you about these missing students and what is being done to find them?

MR. MCNULTY: As I said, there’s an active effort. We’re on the lookout for those individuals, active effort to identify them, but no information to suggest that there’s any threat associated with their whereabouts or why they’re here.

QUESTION: Why then was a BOLO issued if there was no threat? Or maybe this is for Mr. Burrus. Naturally there’s been a lot of interest because of what’s going on in the Middle East. You can understand that there’s public concern whether warranted or not when this report came out, and so there was a BOLO which indicated obvious official concern. And yet you say that there’s no threat, so help explain why this was put out there for public consumption, and yet there’s no threat.

MR. MCNULTY: I think all I’ll say is that it was determined to be a prudent thing to do to make the necessary efforts to identify the individuals, the prudent and responsible thing to do. But at the same time, while we make those efforts then that course requires the cooperation of law enforcement and so BOLOs are a means by which that cooperation is obtained. That is, in a sort of operational sense.

So that method corresponds with the need to be prudent and responsible here, but no reason for that to be associated with a specific threat. It’s just appropriate to make that clear to the public.

QUESTION: I had just a quick question following on my colleague’s question about the money figures. You’ve identified about $8.5 million of profits to the three executives that was attributed to the backdating. That doesn’t strike me as huge given recent corporate scandals. Do you have a figure of the grants to all employees that are attributable to backdating?

MR. MCNULTY: All grants -- not yet. No. That process will be ongoing as we gather more information. The numbers you have here relate to the amount of money that may be directly associated with the backdating or certainly was used to facilitate, if it wasn’t directly resulting from -- facilitating the ability to commit the fraud and bring the fraudulently obtained money in. So that sorting out is going to occur forward. So we freeze the money that constitutes the broadest scope of what we believe would be forfeitable and then we will gather more information and begin to sort out the number.

QUESTION: So those bank-account figures, the $57 million, the $40 million, you’re not sure at this point how much of that constitutes fraudulently obtained profits?

MR. MCNULTY: Correct. Yes.

QUESTION: Was there anything special about the case of Rocade and Comverse that made these two companies the first to get charged? You said you have several ongoing investigations, I mean was it just the first two that you got to or were they particularly brazen or could you just --

MR. MCNULTY: A couple of things stand out. One is that the strength of evidence in both cases, from the government’s perspective -- that’s something will be have to be determined in a court of law, but government felt that we had especially clear, strong evidence to support the charges brought.

In this particular case, we also had the added benefit of cooperation. If you look at some of the dates in here, you’ll note that this conduct became known only in March of this year, and here we are today in early August. So you see that a great deal has been accomplished in a relatively short period of time, and that’s attributable to the fact that we got good cooperation from Comverse and the assistance that companies often provide in bringing information to light that they have found through their efforts, and we see this operating here.

And so that helped get sufficient information faster, and that’s the kind of cooperative approach that we really seek from corporations. We think that the corporations have a fiduciary duty to their stockholders, to the investing public to provide that cooperation to the government. And when they respond appropriately, it can bring these matters into a clear view, we can hold the right people accountable, and, as a result, the marketplace is stronger. And I hope that we see more of that in the cases to come.

Thank you all very much.