[ by Howard Haykin ] The SEC charged a Long Island, NY, data storage company on Wednesday with misleading investors about bribes it paid to obtain business with a subsidiary of JPMorgan Chase.  FalconStor Software, Inc., which admitted to the bribery scheme, agreed to settle the SEC charges by paying a $2.9 million penalty, and agreeing to institute enhanced compliance measures.  The civil lawsuit was filed in U.S. District Court for the Eastern District of New York. SEC Findings and Allegations. FalconStor’s now deceased Co-Founder, Chairman and CEO allegedly ordered the bribes, that were paid to 3 executives of JPMorgan Chase Bank, National Association, and their relatives.  The bribes, started in October 2007, are said to have included lavish entertainment at casinos, and payments in cash, traveler’s checks, gift cards, and grants of FalconStor options and restricted stock.  The recipients apparently helped FalconStor secure a multi-million dollar contract with the JPMorgan Chase subsidiary, the SEC said. The JPMorgan Chase subsidiary became one of FalconStor’s largest customers and FalconStor touted the relationship in earnings calls and releases as proof of the strength of its products and its strides in moving to direct sales rather than relying on 3rd-party distributors.  FalconStor never told investors about the bribes and inaccurately recorded the payments as "compensation," "sales promotion," or "entertainment" expenses.

"FalconStor overstepped the bounds in its pursuit of business. This case shows that when such conduct results in securities law violations, the Commission will not hesitate to hold wrongdoers accountable.  FalconStor claimed the contract was a vindication of the company’s technology, but neglected to tell investors that the contract derived from the bribes that it paid." -- David Rosenfeld, Assoc. Director of the SEC’s NYRO.

FalconStor’s CEO resigned in September 2010, after admitting that he had been involved in improper payments to a customer, and FalconStor’s stock fell by more than 22% on the news. According to the SEC’s complaint, FalconStor made materially misleading statements in earnings releases filed with the SEC in April 2008 and February 2009.  The SEC said FalconStor also granted restricted stock and options to relatives of 2 of the JPMorgan Chase executives even though they provided no bona fide services to the company, making the grants ineligible under FalconStor’s incentive stock plan.  In addition, the SEC said FalconStor failed to accurately record the expenses associated with the bribes on its books and records, and lacked effective internal controls to detect or prevent bribery, which violated state law and FalconStor’s own policies.  The complaint charges FalconStor with violating the books-and-records and internal controls provisions of U.S. securities laws, and violations of the offering registration provisions and certain antifraud provisions. SEC NYRO Staff Credits. Investigation by Leslie Kazon, Joseph Ceglio, Christopher Mele, and Preethi Krishnamurthy. For further details, go to:  [SEC PR 12-123, 6/27/12] and [SEC Complaint].