85 Years — A Seismic Shift in Assessing Losses

POMERANTZ MONITOR | MAY JUNE 2021

By The Editors

Illicit stock options, a slush fund for executives, an international fugitive on the run and some good, old-fashioned lawyering that wrought justice for defrauded investors. In celebration of the founding of the Pomerantz Firm 85 years ago, the Monitor continues its look back at highlights from its history.

In 2006, Pomerantz filed a securities fraud lawsuit against Comverse Technology, Inc. and some of its directors, alleging a stock options back-dating scheme by Comverse. Unbeknownst to investors, the company’s executives, including its founder and former CEO, Jacob (“Kobi”) Alexander, were retroactively “cherry picking” dates when the stock closed at its lowest and falsely claiming that the options were granted on those dates. The exercise prices for the backdated options were thereby based on the stock closing price on the cherry-picked dates. Because the options were, in fact, granted on dates when the market price was higher, backdating placed the options “in the money” the instant they were granted. In some cases, according to the complaint, such grants were made to fictitious employees in order to create a slush fund of backdated options for management to dole out as it pleased.

Investors suffered huge losses when Comverse disclosed its backdating scheme in March and April 2006, as the company’s common stock price dropped 20 percent on the heels of the two announcements.

Judge Nicholas G. Garaufis of the Eastern District of New York referred the lead plaintiff motions to U.S. Magistrate Judge Ramon E. Reyes, Jr. The Magistrate Judge denied Pomerantz’s motion to be named lead counsel on behalf of the Menorah Group, made up of several Israeli institutional investors, and instead named the Plumbers & Pipefitters National Pension Fund (“P&P”) as lead plaintiff.

Pomerantz filed an objection to the Magistrate Judge’s Report and Recommendation and appealed his decision to the district court. The Menorah Group based its objection on the fact that most of P&P’s losses resulted from “in and out transactions,” in that both the purchase and the sale of the shares took place before the alleged misrepresentations were disclosed. The Menorah Group argued that if the “in and out” shares were excluded, P&P did not suffer a $2.9 million loss, but instead actually realized a $132,722 gain. Judge Garaufis agreed, vacated the Magistrate Judge’s ruling, and appointed the Menorah Group as lead plaintiff.

In its objection the Firm cited, among other cases, the then-recent Supreme Court decision Dura Pharmaceuticals, Inc. v. Broudo. There, the Court clarified the applicable standards for pleading loss causation: a purchaser must have retained shares at the time the truth was disclosed to the market. This ruling, plaintiffs alleged, essentially endorsed the Second Circuit Court of Appeals’ decision in Lentell v. Merrill Lynch & Co., Inc., which held that to establish loss causation, a plaintiff must allege “that the misstatement or omission concealed something from the market that, when disclosed, negatively affected the value of the security.”

This decision secured by Pomerantz effected a seismic shift in how courts assess plaintiffs’ losses at the lead plaintiff stage. Patrick V. Dahlstrom, who led Pomerantz’s litigation with Marc I. Gross, stated at the time that the decision “reinforces the growing recognition that courts must conduct such analysis of the facts ... and eliminate those losses that are clearly not recoverable, in determining which movant has the largest financial interest.”

In December 2009, after years of hard-fought litigation, Comverse and Kobi Alexander agreed to settle the lawsuit for $225 million, with $60 million of that total to come from Alexander’s own pockets. The settlement constituted the second-largest recovery ever for shareholders alleging securities fraud claims related to options backdating. The recovery from Alexander was one of the largest ever in a federal securities action from an individual defendant.

After the initial complaints in the action were filed, the three main perpetrators of the fraud – Alexander, CFO David Kreinberg, and General Counsel William F. Sorin – were indicted by the U.S Department of Justice. Rather than surrender to the U.S. Attorney, as he had agreed to do, Alexander fled the country and surfaced months later in Namibia, which did not have an extradition treaty with the United States. Back home in the U.S., his possessions were seized, and he lived as a fugitive from justice, albeit an extraordinarily well-heeled one, for about ten years.

In 2011, Alexander settled the civil charges with the SEC and surrendered bank accounts worth $46 million to federal authorities. In 2016, after a plea bargain, he returned to the U.S. to face criminal charges. In February 2017, he sat in an Eastern District courtroom before Judge Garaufis – a stroke of poetic justice – who sentenced him to 30 months in prison. When Alexander’s attorneys requested that he be free on bail prior to sentencing, Judge Garaufis reportedly said, “Spare me – I wasn’t born yesterday.” A month later, Alexander was transferred to Israel to carry out his remaining sentence; he was released on probation in October 2018 and was not allowed to travel abroad until April 2019. The Monitor was unable to confirm reports that he is now living freely in the United States.