Kobi Alexander - what's all the fuss about?

Why the former Comverse chief - and others - are in the hot seat over options.

By SUSAN LERNER
October 5, 2006 23:38
3 minute read.

 
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"I can't believe he's going to get away with it," said a colleague when Jacob "Kobi" Alexander was released on bail from a Namibian jail this week. Others wondered whether he was being targeted because he was Israeli, while some were clueless as to who he even was - hard to imagine given that his face and story have been splattered across the pages of the country's papers (including this one for months). For those who've been under a rock, Alexander is the founder and former chief executive officer and chairman of Comverse Technology Inc., a provider of telecommunications applications such as voice-mail and one of the original hi-tech success stories to come out of Israel. Alexander, David Kreinberg, the company's former chief financial officer, and William F. Sorin, its former general counsel and corporate secretary, were charged in New York in July with conspiring to violate US securities laws and commit mail and wire fraud. Yet while Kreinberg and Sorin stuck around to face the judge, Alexander bolted after transferring tens of millions of dollars from brokerage accounts in the US to accounts in Israel. He then spent some two months on the FBI's most-wanted list before being apprehended last week in Namibia, where he had set up "home" with his family. Until his arrest, Namibia had no extradition agreement with the US though one was quickly implemented effective retroactively to the date of his capture. The charges stem from Comverse's backdating of the stock options it issued to its executives and employees. This means that executive stock options, which generally are granted "at-the-money" - so that the future exercise price is set at the same price as the stock trades on the grant date - are instead "backdated" with an earlier date when the market price was particularly low. Doesn't sound "nice." But illegal? According to the University of Iowa, which has published extensive research on the subject, it's not necessarily a breach of law, if no documents have been forged and the backdating is communicated clearly to shareholders and is reflected properly in earnings and taxes. "Unfortunately, these conditions are rarely met, making backdating of grants illegal in most cases," the university says. And so arrives the latest corporate scandal in which Comverse and Alexander are hardly alone. Bloomberg reports that more than 100 companies, including Home Depot and Apple Computer, have announced investigations into their options grants and that more than 220 investor lawsuits against 70 companies have been filed demanding restitution and damages. What many companies forget in their rush to collect IPO riches (or become blase about somewhere down the road) is that when they go public they get new bosses - their shareholders. For a while, it seems, regulators like the Securities and Exchange Commission also forgot. But in the face of public outrage over massive corporate corruption in recent years from Enron to WorldCom, as well as shady analyst recommendations and improper mutual fund trading, authorities are keeping a closer watch, so it is hardly surprising that yet another scandal has been uncovered. Companies themselves also are getting into the act of conducting internal probes. One of the original companies caught up in the options grant mess was Mercury Interactive, with dual headquarters in Yehud and California, which this summer agreed to be acquired by Hewlett-Packard Co. for $4.5 billion. Last year, its CEO Amnon Landan, Chief Financial Officer Douglas Smith and General Counsel Susan Skaer resigned after a company investigation found they manipulated the grant dates of stock options. Last week, the company offered to pay a $35 million civil penalty to settle an SEC investigation of its option granting practices. Comverse, meanwhile, in mid-August announced that in accordance with determinations of a special committee of its board of directors it was terminating all prior employment and similar agreements or arrangements with Alexander, Kreinberg and Sorin as well as revoking any and all vested and unvested unexercised options and would not make any severance or other payments to them. But executives with Israeli ties such as those at Comverse and Mercury are not the only ones to have lost their jobs over the issue. Chief executives have been ousted at Brocade Communications Systems and Vitesse Semiconductor, while numerous corporate officials at other companies also have been given the boot - and the list is likely to continue to grow. As is the list of companies that will be hurt financially by the scandal. Bloomberg reports that at least 19 companies including Broadcom and Applied Micro Circuits already have restated profits by $2.5b. and that more than 30 companies have said they may revise earnings, among them Cablevision Systems and Cheesecake Factory. Comverse and Mercury a witch-hunt for Israelis? Not likely.

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