The Securities and Exchange Commission has filed a settled civil complaint against Verint Systems, a former subsidiary of Comverse Technology, alleging a fraudulent scheme involving improper accounting practices.
The complaint alleges the misconduct began as early as 1998, when Verint was a wholly-owned subsidiary of Comverse Technology, Inc., whose former CEO Kobi Alexander fled the U.S. in 2006 to avoid fraud charges and is still fighting extradition from Namibia.
The SEC alleges that the misconduct continued after Verint became a publicly traded company, while still majority-owned by Comverse, in 2002. The SEC also instituted separate administrative proceedings against Verint on Wednesday to determine whether the registration of each class of its securities should be revoked or suspended for a period not exceeding 12 months for its failure to file required periodic reports for over four years.
In a settled complaint, filed Wednesday in the U.S. District Court for the Eastern District of New York, the SEC alleges that from 1998 through at least January 2003, Verint improperly established and maintained or released reserves as necessary to meet its financial objectives, build a stockpile of reserves prior to becoming a public company for future earnings management purposes, and to ensure greater public demand and a better price for its follow-on offering in June 2003. These improper accounting practices did not conform to GAAP. The Melville, N.Y.-based technology company specializes in selling enterprise workforce optimization and security intelligence software.
On May 16, 2002, Verint commenced its initial public offering of 4.5 million shares of common stock at a price of $16 per share. Its balance sheet held approximately $6.5 million excess reserves at the time. Its Form S-1 registration statement reported historical earnings and loss figures that had been materially altered by its historically improper reserve accounting. On June 13, 2003, Verint commenced a follow-on offering for 5 million shares of common stock at a price of $23 per share. Its Form S-3 registration statement reported materially misleading earnings and loss figures, including for the period after the IPO, as a result of its improper accounting for reserves.
In the two years subsequent to its follow-on offering, Verint overstated its pre-tax income and would not have met Wall Street analysts' consensus earnings estimates but for its improper reserve accounting.
The SEC complaint alleges that as a result of this misconduct, Verint's books and records falsely and inaccurately reflected, among other things, the company's liabilities, expenses, net income, and general financial condition through at least the fiscal year ended Jan. 31, 2005. The complaint also alleges that Verint failed to maintain a system of internal accounting controls sufficient to provide assurances that its reserve activity was recorded as necessary to permit the proper preparation of financial statements in conformity with GAAP.
Without admitting or denying the allegations, Verint has consented to the entry of a final judgment permanently enjoining it from violating the antifraud, reporting, record-keeping, and internal controls provisions of the federal securities laws. In accepting the settlement offer, the SEC considered, among other things, Verint's remediation and cooperation in the investigation. The settlement is subject to the approval of the U.S. District Court for the Eastern District of New York.
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