The Wall Street Journal-20080130-Probe Finds Comverse Executives Falsified Results
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Probe Finds Comverse Executives Falsified Results
Full Text (467 words)Comverse Technology Inc.'s former top executives routinely manipulated the company's earnings to meet Wall Street expectations, according to the final results of an internal probe.
Results of the internal investigation, released yesterday, also accused Comverse's now-fugitive former chief executive, Kobi Alexander, of falsifying the date when he exercised certain stock options, a maneuver sometimes used to avoid taxes. The finding could mean new legal woes for Mr. Alexander, who has been fighting extradition to the U.S. from the African nation of Namibia.
The internal investigation originally was commissioned in early 2006 to probe the backdating of stock-option grants, which involves falsifying the dates of option awards to enhance their value to the recipient. The probe eventually expanded to include other problems at the New York-based maker of communications systems and software.
Two former top executives of the company have pleaded guilty to criminal charges related to the options backdating, including David Kreinberg, the former chief financial officer. The case is being handled by the U.S. Attorney in Brooklyn, N.Y.
Robert Morvillo, an attorney for Mr. Alexander, said he hadn't reviewed the company's filing and declined to comment on it. He said his client had adjusted to life in Namibia and "seems to be content."
In its filing yesterday, Comverse said Mr. Kreinberg told its investigators that he had been ordered by Mr. Alexander to "create desired earnings per share" by routinely making improper accounting adjustments.
One maneuver allegedly involved the creation of reserves that could later be used to bolster earnings. The reserves were kept on an Excel spreadsheet, according to Comverse, with a "hidden column" for the amount of reserves available to pump up earnings. Overall, the manipulations resulted in understating Comverse's income from 1996 through 1999, and overstating it from 2000 through 2002. Because the adjustments balanced each other out, the cumulative impact was "insignificant," according to the report.
The new options-finagling accusation against Mr. Alexander involves a 1998 exercise of 675,000 stock options. In 1998 filings, the then- Comverse chief claimed he had exercised the options in October of that year, when Comverse's stock was near a quarterly low point of about $10 per share. Mr. Alexander didn't tell regulators about the transaction until two months later, by which time the stock price had more than doubled.
In 2006, an accounting-research company, Gradient Analytics Inc., suggested the exercise may have been backdated, reducing the amount subject to ordinary income taxes by as much as $8.72 million. In yesterday's filing, Comverse agreed that the exercise timing had been backdated, and it said "Alexander may have achieved certain tax benefits as a result of the improper recording of the exercise date."
Mr. Alexander recently sued Comverse for $72 million in severance and past compensation, following a suit filed by the company against him earlier this month.
