FalconStor Agrees To $5M Settlement In Founder's Bribery Lawsuit


Disk-based data protection and storage virtualization vendor FalconStor is close to settling a long-running investor lawsuit stemming from bribery charges leveled in 2010 against the company's founder, ReiJane Huai, and two of the company's sales representatives.

FalconStor, Melville, N.Y., on Thursday said it has reached a settlement in principle in the class-action lawsuit filed following allegations that Huai and the two reps bribed JP Morgan Chase, a FalconStor customer.

The bribes, to which FalconStor admitted as part of last year's $5.8-million settlement with the U.S. Attorney's Office for the Eastern District of New York, amounted to over $300,000 in restricted FalconStor shares, stock options, gambling vouchers, gift cards, golf memberships and golf-related benefits between October 2007 and September 2010.

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FalconStor falsely recorded the bribes as "compensation to an advisor" or as "employment bonuses," the U.S. Attorney's office said in June

FalconStor on Thursday said the company and its class plaintiffs have signed a memorandum of understanding under which FalconStor will pay $5 million to settle the action. That settlement includes damages, plaintiffs' attorneys' fees and related administrative costs.

Seth Horowitz, general counsel for FalconStor, said the agreement still requires final court approval.

"We are very pleased that we are resolving the actions arising from the bad acts of a few employees who are no longer with us," Horowitz told CRN.

Bribes given to JP Morgan Chase helped FalconStor close three contracts worth a total of $12.2 million between March 2008 and November 2009. That represented about 7 percent of FalconStor's revenue during 2008 and 2009.

The bribes had significant repercussions at FalconStor. ReiJane Huai in September 2010 abruptly resigned as FalconStor Software's president, CEO and chairman after word of the government investigation became public.

Almost one year later to the day, Huai, who founded FalconStor in 2000, fatally shot himself on the front yard of his home.

Once the court approves the class-action lawsuit settlement, FalconStor will still be subject to a deferred prosecution agreement with the U.S. Attorney's office, which is due to expire in December of 2013, Horowitz said.

PUBLISHED JAN. 11, 2013