N.Y. Data Storage Company Admits to Bribing JPM Execs

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A Long Island, N.Y., software company will pay $5.8 million in criminal and civil penalties to resolve U.S. probes over an alleged conspiracy to pay bribes to executives at a JPMorgan Chase (JPM) subsidiary.

The agreement resolves investigations by the Department of Justice and the Securities and Exchange Commission against FalconStor Software.

Federal prosecutors in Brooklyn alleged that FalconStor arranged for executives of JPMorgan's Global Technology Infrastructure division in Columbus, Ohio, to receive more than $300,000 in restricted FalconStor shares, stock options, gambling vouchers, gift cards, golf memberships and golf-related benefits between October 2007 and September 2010.

The bribes were in exchange for three contracts for the licensing of FalconStor's storage software and related maintenance services, totaling $12.2 million, prosecutors said. The contracts represented about 7% of FalconStor's revenue between 2008 and 2009, prosecutors said.

"Rather than let their product compete fully and fairly in the marketplace, FalconStor resorted to bribery and graft to win important contracts, in a scheme that reached the highest levels of the company," said Loretta Lynch, the U.S. attorney in Brooklyn.

As part of the pact, FalconStor will enter a deferred prosecution agreement with the Justice Department, in which it will pay a $2.9 million criminal penalty, admit to wrongdoing and institute a number of corporate compliance reforms. The company will pay an additional $2.9 million penalty as part of a civil settlement with the SEC.

The SEC said the company made materially misleading statements in its earnings announcements in April 2008 and in February 2009 and failed to accurately record expenses associated with the bribes in its books.

"FalconStor overstepped the bounds in its pursuit of business," said David Rosenfeld, associate director of the SEC's New York Regional Office. "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."

FalconStor's longtime chairman and chief executive resigned in September 2010 after disclosing that "improper payments" were made to a customer.

A lawyer for FalconStor didn't immediately respond to a request for comment Wednesday. JPMorgan declined comment Wednesday.

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