UPDATE 2-FalconStor to pay $5.8 mln to settle bribe charges

Thu Jun 28, 2012 2:36am IST

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By Jessica Dye

NEW YORK, June 27 (Reuters) - FalconStor Software Inc will pay $5.8 million to resolve criminal and civil charges that it bribed JP Morgan Chase Bank NA executives to obtain $12 million in software contracts, federal prosecutors said on Wednesday.

According to a criminal complaint filed in Brooklyn federal court, FalconStor offered more than $300,000 in restricted FalconStor shares, stock options, gambling vouchers, gift cards and golf perks to JP Morgan executives in Columbus, Ohio, in exchange for $12.2 million in software contracts.

FalconStor, a publicly traded company on Long Island, New York, that sells data storage and protection products, was also charged with falsifying records to cover up the bribes. It labeled payments to JP Morgan executives as "employment bonuses" or "compensation to an advisor," court documents said.

The company admitted the allegations in the criminal complaint.

"We are happy we were able to cooperate with the authorities and reach a settlement to put this behind us," said FalconStor CEO James McNeil.

McNeil said the three FalconStor employees involved in the investigation have left the company. One of them is former FalconStor CEO Reijane Huai, who resigned from the company amid an internal investigation into improper payments. He was found dead of an apparent suicide in September.

A spokeswoman for JP Morgan did not immediately reply to a request for comment.

The unnamed JP Morgan employees were in the global technology infrastructure division, based in Columbus, Ohio, which purchases electronic data storage products for the company.

According to the complaint, FalconStor employees lavished thousands of dollars in gift cards, stock and other perks on the JP Morgan executives and their relatives. On one occasion, FalconStor paid one of its salespeople a $240,000 bonus with instructions to deposit $100,000 of that in a gambling account in Las Vegas for one of the JP Morgan executives, according to the complaint.

FalconStor has entered into a deferred prosecution agreement with the U.S. attorney's office in Brooklyn, in addition to forfeiting $2.9 million, the office said. As part of the agreement, FalconStor will make several corporate governance reforms, including splitting the roles of chief executive officer and chairman of the board of directors and revising its gift policies.

Pursuant to the agreement, the U.S. government will defer prosecution of FalconStor for 18 months. If FalconStor complies with the deal, the criminal charges will be dismissed, federal prosecutors said.

The U.S. Securities and Exchange Commission filed parallel civil charges against FalconStor on Wednesday. FalconStor agreed to pay $2.9 million in civil penalties in a settlement that must be approved by the court.

Falconstor was sued by its shareholders in a 2010 class-action lawsuit accusing it of covering up improper payments, thereby allowing its stock to trade at artificially high prices between 2009 and 2010. That case is still pending in Brooklyn federal court.

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