FalconStor to pay $5.8M to settle SEC bribery charges

by John Callegari Published: June 27, 2012 Tags: , , , ,

Melville-based FalconStor Software agreed on Wednesday to pay $5.8 million to settle charges that its former chief executive mislead investors about bribes it paid to obtain business with a J.P. Morgan Chase & co. subsidiary.

FalconStor will pay a $2.9 million penalty to settle the Security and Exchange Commission’s civil lawsuit, and an additional $2.9 million as part of a deferred prosecution agreement – allowing the company not to be prosecuted if it pays within 18 months – to settle the U.S. Attorney’s Office’s criminal complaint.

FalconStor officials said they have set the $5.8 million aside in a reserve fund.

Former FalconStor CEO and co-founder ReiJane Huai ordered bribes that were paid to three JPMorganChase executives starting in October 2007, according to the SEC complaint.

The bribes included entertainment at casinos and payments in cash, traveler’s checks, gift cards and grants of FalconStor options and restricted stock. The SEC said FalconStor also granted restricted stock and options to relatives of two of the JP Morgan Chase executives even though they provided no bona fide services to the company.

The bribes helped FalconStor secure a multimillion contract with the J.P. Morgan Chase subsidiary, the SEC said. FalconStor went on to tout the relationship in earnings calls, labeling the bribes as “compensation,” “sales promotion,” or “entertainment” expenses.

Huai died in an apparent suicide the day before he was to plead guilty for his role in the bribery scheme. Huai had resigned in September 2010, after admitting he had been involved in improper payments to a customer. FalconStor’s stock fell by more than 22 percent on the news.

Current executives at FalconStor said they were relieved that the ordeal had finally ending, concluding a dark chapter in the company’s history.

“We are pleased to resolve these investigations,” FalconStore President and CeO Jim McNiel said. “Since the commencement of these investigations in 2010, we have cooperated fully with the SEC and the United States Attorney’s Office and we also conducted our own rigorous, independent investigation. The acts which resulted in these settlements are contrary to our core values, our policies and our expectations for ethical behavior. we have further strengthened the compliance culture within the company by making improvements and enhancements to our compliance program.”

FalconStor’s stock closed up 9 cents, to $2.72, or 3.4 percent, on Wednesday.

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FalconStor to pay $5.8M to settle SEC bribery charges

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