Securities and Exchange 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, 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.