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U.S. SECURITIES AND EXCHANGE COMMISSION

Litigation Release No. 21091 / June 18, 2009

Accounting and Auditing Enforcement Release No. 2995 / June 18, 2009

Securities and Exchange Commission v. Ulticom, Inc., United States District Court for the Eastern District of New York, Civil Action No. 09-CV-02589-JS-ARL (E.D.N.Y. June 18, 2009)

Securities and Exchange Commission v. Lisa M. Roberts, United States District Court for the Eastern District of New York, Civil Action No. 09-CV-02590-LDW-AKT (E.D.N.Y. June 18, 2009)

SEC SUES ULTICOM AND FORMER ULTICOM EXECUTIVE FOR FRAUDULENT OPTIONS BACKDATING AND EARNINGS MANAGEMENT SCHEMES

The Securities and Exchange Commission today filed settled civil charges against Ulticom, Inc. and a former executive, Lisa M. Roberts, for two separate fraudulent schemes, involving improper options backdating practices and certain improper accounting practices. The Commission's Complaint against Ulticom alleges the misconduct began in 1996, when Ulticom was a wholly-owned subsidiary of Comverse Technology, Inc. ("Comverse"), and continued after Ulticom became a publicly-traded company, while still majority-owned by Comverse, in 2000.

According to the Commission's Complaint, between April 2000 and April 2004, Ulticom improperly recorded the grant dates of eight company-wide grants of employee stock options. The Complaint alleges:

  • Ulticom backdated four of these option grants to coincide with near-term lows in the company's stock price. The options in these four grants were "in-the-money," meaning the exercise prices of the backdated Ulticom options were less than the company's stock price on the date the grants were formally approved by Ulticom's Stock Option Committee.

  • The backdating allowed Ulticom to award employees disguised in-the-money options, without recording a corresponding non-cash compensation expense for the in-the-money portion of the option grant in conformity with U.S. Generally Accepted Accounting Principles (GAAP).

The Commission's Complaint alleges that Ulticom's second scheme involved certain long-standing and improper accounting practices that were not in conformity with GAAP. Specifically, the Complaint alleges:

  • From 1996 until its initial public offering in April 2000, Ulticom made improper adjustments to its reserve accounts in order to stockpile reserves. In its first fiscal year following its IPO, Ulticom released some of these improper excess reserves into income.

  • Without these improper releases, the company would not have met Wall Street analysts' earnings estimates.

  • In addition, from 1998 to April 2001 Ulticom improperly deferred to subsequent periods the recognition of revenues from certain shipments and service contracts between itself and another subsidiary of Comverse.

According to the Complaint, as a result of these two schemes, Ulticom filed materially false and misleading financial statements with the Commission that misstated the company's revenues, expenses, liabilities, net income, and earnings per share and made other materially false and misleading disclosures on reports filed with the Commission through April 15, 2005, when it filed its 2004 annual report. In a related Complaint, the Commission also brought suit against Roberts for her alleged participation in these two schemes while serving in various senior accounting and management positions at Ulticom, including Chief Financial Officer ("CFO"), and for misleading the company's auditors in furtherance of the accounting fraud.

Without admitting or denying the allegations of the Commission's Complaint, both Ulticom and Roberts have consented to the entry of final judgments permanently enjoining them from violating the antifraud, reporting, record-keeping, and internal controls, and other provisions of the federal securities laws. Specifically, the proposed final judgment against Ulticom would permanently enjoin it from violating Section 17(a) of the Securities Act of 1933 ("Securities Act"), Sections 13(a), 13(b)(2)(A), 13(b)(2)(B), and 14(a) of the Securities Exchange Act of 1934 ("Exchange Act"), and Exchange Act Rules 13a-1, 13a-11, 13a-13, and 14a-9. In accepting the settlement offer, the Commission considered, among other things, Ulticom's extensive cooperation in the Commission's investigation.

The proposed final judgment against Roberts would permanently enjoin her from violating Section 17(a) of the Securities Act, Sections 10(b) and 13(b)(5) of the Exchange Act, Exchange Act Rules 10b-5, 13b2-1, and 13b2-2, and for aiding and abetting Ulticom's violations of Exchange Act Sections 13(a), 13(b)(2)(A), 13(b)(2)(B), and 14(a) and Exchange Act Rules 13a-1, 13a-11, 13a-13, and 14a-9. In addition, Roberts has agreed to pay a $25,000 civil monetary penalty and has consented to an order that would prohibit her from acting as an officer or director of any issuer that has a class of securities registered pursuant to Section 12 of the Exchange Act or that is required to file reports pursuant to Section 15(d) of the Exchange Act. As part of her settlement with the Commission, and following the entry of the proposed final judgment, Roberts has consented to the entry of an administrative order, pursuant to Rule 102(e)(3) of the Commission's Rules of Practice, suspending her from appearing or practicing before the Commission as an accountant, with the right to reapply after five years.

The settlements are subject to the approval of the United States District Court for the Eastern District of New York.

The Commission today also announced the filing of settled civil charges against Comverse for fraudulent options backdating and improper accounting practices, including earnings management. For further information, see Litigation Release Nos. 19796 (August 9, 2006), 19878 (October 24, 2006), 19964 (January 10, 2007), and 21091 (June 18, 2009).

The Commission previously charged former Comverse Chairman and CEO Jacob "Kobi" Alexander, former Comverse Chief Financial Officer David Kreinberg, and former Comverse General Counsel William F. Sorin. Kreinberg and Sorin later reached independent settlements with the Commission.

SEC Complaint v. Ulticom
SEC Complaint v. Roberts

 

http://www.sec.gov/litigation/litreleases/2009/lr21091.htm


Modified: 06/18/2009