Litigation Release No. 21090 / June 18, 2009

Accounting and Auditing Release No. 2994 / June 18, 2009

Securities and Exchange Commission v. Comverse Technology, Inc., United States District Court for the Eastern District of New York, Civil Action No. 09-CV-02588-DRH-AKT (E.D.N.Y. June 18, 2009)


The Securities and Exchange Commission ("Commission") today filed a settled civil action in the United States District Court for the Eastern District of New York against Comverse Technology, Inc. ("Comverse") alleging that it engaged in two separate fraudulent schemes, during the course of more than a decade, to materially misstate its financial condition and performance metrics. According to the Complaint, as a result of its improper conduct, Comverse was able to portray itself as a company with steady, but measured growth, which regularly met analysts' earnings targets.

According to the Commission's Complaint, the first scheme involved improper backdating of Comverse stock options granted between 1991 and 2001. With respect to the backdating scheme, the Complaint alleges:

  • Comverse routinely backdated grants of stock options made to the Company's employees, officers, and others to coincide with historically low closing prices for the Company's common stock, distributing options from at least 26 backdated grants. Six out of seven company-wide grants made by Comverse during the relevant period were granted at, or near, the lowest stock price for the fiscal quarter or year.

  • Comverse awarded employees these disguised in-the-money options without recording a corresponding compensation expense for the in-the-money portion of the option grant. The failure to record the expense did not conform to U.S. Generally Accepted Accounting Principles.

  • Comverse also made grants to fictitious employees in order to establish an illegal pool of options thereby creating a slush fund of "in-the-money" stock options to later use in circumvention of the approved stock option grant process.

Comverse's second fraudulent scheme involved several improper accounting practices. According to the Complaint:

  • Comverse improperly built up, and subsequently improperly released, certain reserves to meet earnings targets, improperly reclassified certain expenses to manipulate other performance metrics, and made false disclosures about its backlog of sales orders.

  • The manipulation of earnings allowed Comverse to meet or exceed Wall Street analysts' consensus earnings estimates in every quarter between 1996 and the first quarter of 2001.

  • As a result of the accounting fraud, Comverse understated its pre-tax income in fiscal years 1996 through 1999, overstated its pre-tax income in fiscal years 2000 to 2003, and made materially false and misleading disclosures about its operating margins and sales backlog.

The Complaint also alleges that Comverse published materially false and misleading financial information about its quarterly and annual pre-tax earnings, net income, operating income, liabilities, cost of goods sold, research and development expense, and sales order backlog in reports filed with the Commission, including its annual and quarterly reports for fiscal years 1995 through 2005.

Without admitting or denying the allegations of the Commission's Complaint, Comverse has consented to the entry of a final judgment permanently enjoining it from violating the antifraud, reporting, record-keeping, and internal controls provisions of the federal securities laws. Specifically, the proposed final judgment would permanently enjoin Comverse from violating Section 17(a) of the Securities Act of 1933, Sections 10(b), 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 10b-5, 12b-20, 13a-1, 13a-11, 13a-13, and 14a-9. In accepting the company's settlement offer, the Commission considered, among other things, Comverse's extensive cooperation in the Commission's investigation.

The settlement is subject to the approval of the United States District Court for the Eastern District of New York.

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 each settled with the Commission. The Commission today also announced the filing of settled civil charges against Ulticom, Inc., a majority owned subsidiary of Comverse whose stock is also publicly traded, for fraudulent options backdating and earnings management practices. For further information, see Litigation Release Nos. 19796 (August 9, 2006), 19878 (October 24, 2006), 19964 (January 10, 2007), and 21090 (June 18, 2009).

SEC Complaint