FUGITIVE ALEXADER SETTLES FORFEITURE CLAIMS AND SEC CASE

Being a fugitive and fighting extradition did not impede the former chairman and CEO of Comverse Technology, Inc. from settling with the SEC and, at least in part, the Justice Department. Jacob “Kobi” Alexander, out on bail in Namibia, settled his option backdating case with the Commission. SEC v. Alexander, Civil Action No. 06-CV-3844 (E.D.N.Y. Filed Aug. 9, 2006). He also settled a civil forfeiture action which is an offshoot of the criminal case against him. U.S. v. All Funds on Deposit, Case No. 06-cv-3730 (E.D.N.Y.).

Four years ago, the SEC filed a civil fraud complaint against Mr. Alexander and two other former company executives based on option backdating claims. The complaint claims that for over a decade Mr. Alexander and others granted in-the-money options to themselves and others by backdating the grants. The complaint claims that Mr. Alexander maintained a slush fund of backdated options, created by having them granted to fictitious employees. Options from the fund were used to recruit and retain key personnel. Since the backdated options were not properly accounted for in the books and records of the company, its net income and earnings per share were materially overstated for years.

Criminal charges were filed against Mr. Alexander simultaneous with the Commission’s complaint. The charges are based on the same option backdating scheme detailed in the SEC complaint. U.S. v. Alexander, No. 06-cv-3844 (E.D.N.Y.). Shortly prior to the filing of these actions Mr. Alexander, an Israeli citizen, fled to Namibia where he was arrested. Although the U.S. has sought extradition Mr. Alexander remains free on bail in that country. Earlier this year, an appeals court in Namibia declared part of the country’s Extradition Act unconstitutional based on Mr. Alexander’s petition.

Following the institution of criminal charges, the government filed the All Funds civil forfeiture action. It sought the forfeiture of over $46 million in two investment accounts. The funds on deposit were claimed to be the proceeds of the option backdating scheme. Mr. Alexander and his wife contested the case. The district court struck his claims primarily because he is a fugitive. That ruling is on appeal.

The Commission’s case and the civil forfeiture action were settled simultaneously. Under the agreement in the civil forfeiture action, Mr. Alexander and his wife will forfeit over $46 million. Those funds will be returned to the company and used to resolve the civil actions against it arising out of the backdating claims.

The Commission’s action was resolved with a consent to the entry of a permanent injunction prohibiting future violations of Securities Act Action 17(a) and Exchange Act Sections 10(b), 13(b)(5), 14(a) and 16(a). In addition, Mr. Alexander agreed to pay $26,206,298 in disgorgement and $21,442,157 in prejudgment interest along with a $6 million civil penalty. Mr. Alexander will also be permanently barred from serving as an officer or director of a public company. His disgorgement and prejudgment interest obligations are deemed satisfied by the entry of the order in the civil forfeiture action. The other defendants settled with the Commission earlier.

THE INSIDER TRADING PROBES: MORE BLUE COLLAR TACTICS

Insider trading involving hedge funds and their expert advisers is the focus of a probe by the U.S. Attorneys Office for the Southern District of New York, the FBI and the SEC, according to multiple media sources. Spokesmen for the USAO and the SEC have declined comment. Nevertheless, information is circulating about a wide spread insider trading investigation that may result in the filing of charges by year end. The precise source of the information is unclear.

What is clear is that the FBI is continuing to use “blue collar” tactics in securities cases, conducting raids at three hedge funds on Monday. Search warrants were used to seize business records and other documents. The funds raided are Level Global Investors LP, Diamondback Capital Management LLC and Loch Capital Management. Level Global and Diamondback Capital were founded by individuals who were formerly affiliated with SAC Capital. Level is partially owned by a leverage-buyout firm run by Goldman Sachs Group, Inc.

What is clear is that no charges have been brought against Level Global, Diamondback Capital and Loch Capital. No charges have been filed against any employee or affiliate of any of these funds. Two of the funds have issued press releases stating that they are cooperating with the government.

What is clear is that hedge funds, like other professional service firms, rely for their continued operations on their good reputations. While these funds may have billions of dollars under management, the key to their current and future operations is their good name. If that reputation is tarnished, the billions of dollars under management can become zero in short order. Ask one time Wall Street power house Drexel. Ask one time accounting giant Arthur Anderson. Both charged. Both out of business. In this context, the power to accuse is the power to terminate. For hedge funds such as those in the raid, the suggestion of illegality in their core business of trading securities can translate to the beginning of the end.

What is not clear is the reason the government is using blue collar tactics like search warrants rather grand jury subpoenas. A search warrant is high profile. It is invasive. It generates publicity as is evident from the news reports about the three executed on the premises of these hedge funds. A grand jury subpoena is not high profile. Grand jury proceedings are secret to protect those involved. A grand jury subpoena does not have the invasive impact of dozens of FBI agents seizing a business premises and going through all of the records to find what they want. Both can secure the information the government wants.

In the end, one or more of the raided firms may be charged with insider trading. One or more of the individuals employed at these firms may be charged with a federal crime. Perhaps not. Perhaps no one will be charged. Either way, the waves of negative publicity will, for many investors and potential clients of these firms forever tar their reputations. For many FBI agents raiding the business like a mob warehouse is the equivalent of an accusation of wrong doing tending toward a conviction by a jury.

It is beyond dispute that the USAO, the FBI and the SEC should effectively police the markets to prohibit insider trading. Equally fundamental is the fact that in doing so they should use methods which are effective, but respect the rights of those involved. This means the techniques should be the least intrusive necessary and avoid injury. FBI raids against securities traders, rather than grand jury subpoenas raise fundamental questions about the operations of law enforcement and its ability to protect the rights of all.