Litigation Release No. 22405 / June 28, 2012

Accounting and Auditing Enforcement No. 3392 / June 28, 2012

SEC v. FalconStor Software, Inc., United States District Court for the Eastern District of New York, Civil Action No. CV 12-3200 (DRH) (filed on June 27, 2012)

SEC Charges Long Island Software Company in Connection with Bribery Scheme

On June 27, 2012, the Securities and Exchange Commission ("Commission") charged that FalconStor Software, Inc., a Long Island, N.Y., data storage company, misled investors about bribes it paid to obtain business with a subsidiary of J.P. Morgan Chase & Co. FalconStor has agreed to pay a $2.9 million civil penalty to settle the Commission's case.

The Commission's complaint, filed in federal district court in the Eastern District of New York, alleges that from October 2007 through July 2010, the Company's co-founder and then-chief executive officer, president and chairman, who is now deceased (the "CEO'), ordered the bribes, which were paid to three executives of the subsidiary, JPMorgan Chase Bank, National Association, and their relatives. The bribes given and offered, which totaled approximately $430,000, included grants of FalconStor options and restricted stock, direct cash payments, gift cards, payment of golf club fees, and lavish entertainment, including gambling in Macau and Las Vegas casinos. The CEO resigned in September 2010, after admitting that he had been involved in improper payments to a customer.

The complaint further alleges that shortly after the bribes began, FalconStor secured a direct, multi-million dollar, contract with JPMC, which then became one of FalconStor's largest customers and a major source of FalconStor's revenue during the relevant period. Thereafter, on several quarterly earnings calls and in two earnings releases filed with the Commission on Forms 8-K in April 2008 and February 2009, the CEO touted FalconStor's large, direct contract with JPMC as a vindication of the quality and desirability of FalconStor's products and proof of its strides in moving to direct sales rather than relying on third-party distributors. FalconStor never disclosed that JPMC's business resulted, in whole or in part, from the inducements that it was lavishing on JPMC's employees.

The complaint also alleges that the Company also granted restricted stock and options to relatives of two of the executives even though the recipients provided no bona fide services to the Company and the grants were thus not covered by the Company's registered Incentive Stock Plan. In addition, the Company failed to accurately record the expenses associated with the bribes on its books and records, and failed to devise or implement a system of effective internal accounting controls to detect or prevent the bribes, which violated state law and were inconsistent with the Company's policies.

The complaint charges FalconStor with violating the books-and-records and internal controls provisions of the Securities Exchange Act of 1934, Sections 13(b)(2)(A) and 13(b)(2)(B), and the offering registration provisions and certain antifraud provisions of the Securities Act of 1933, Sections 5(a), 5(c), and 17(a)(2) and (3).

FalconStor has agreed to settle this matter by consenting to a court order permanently enjoining it from violating Sections 5(a), 5(c), and 17(a)(2) and (3) of the Securities Act and Sections 13(b)(2)(A) and 13(b)(2)(B) of the Exchange Act; ordering it to pay a civil monetary penalty of $2.9 million; and ordering it to comply with certain undertakings. The proposed settlement is subject to court approval.

FalconStor is a Delaware corporation headquartered in Melville, New York. The Company also maintains offices in California, and throughout Europe, Asia and Australia. FalconStor's common stock trades on NASDAQ under the symbol FALC.

The Commission thanks the U.S. Attorney's Office for the Eastern District of New York and the Federal Bureau of Investigation, and acknowledges to cooperation of the New York County District Attorney's Office in this investigation.