FalconStor Settles Bribe Charges Over JP Morgan Chase Deal For $5.8M

Storage vendor FalconStor Software has agreed to pay nearly $6 million in fines and penalties to settle a criminal case stemming from bribes allegedly given to JP Morgan Chase executives to expedite the signing of business contracts.

The U.S. Attorney's Office for the Eastern District of New York on Wednesday released a statement which said FalconStor will pay $5.8 million and institute comprehensive reforms over the bribes.

The bribes, which FalconStor admitted to as part of the settlement, 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, according to the U.S. Attorney's office.

[Related: FalconStor Founder, Storage Visionary Huai Found Dead Amid Investigation ]

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

The bribes helped FalconStor close three contracts with JP Morgan Chase -- worth a total of $12.2 million in sales -- between March 2008 and November 2009. That figure represented about 7 percent of FalconStor's revenue during 2008 and 2009, the U.S. Attorney's office said.

The bribes had significant repercussions at FalconStor, whose Chairman and CEO ReiJane Huai abruptly resigned in September 2010 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.

The investigation into the bribes impacted FalconStor on multiple levels over the last couple of years, said Fadi Albatal, FalconStor's vice president of marketing.

"It's hard to quantify the impact," Albatal said. "We know from conversations internally that it impacted the morale of our people, and that our people were questioning our core values. But when the investigation happened, we started our own investigation and found this was an isolated case. One account, three people."

Unfortunately for FalconStor, the acts of those three people, including Huai and two sales reps, gave competitors an opening, Albatal said.

"You had competitors start questioning the viability of FalconStor," he said. "We know that was never a question. But it was a cloud over our heads. Now the cloud is gone."

J.P. Morgan is still a FalconStor customer, Albatal said.

NEXT: Measuring The Impact Of The Settlement

"Ultimately, when you look at the value of the software they got, you ask, why did they go that route?" FalconStor’s Albatal said. "Ultimately, they got great value from the software. Maybe it was a case of inexperienced sales reps. But we look at it and think, why did we ever do that?"

Greg Knieriemen, vice president of marketing at Chi Corp., a Cleveland, Ohio-based solution provider and long-time FalconStor partner, said that while the bribe investigation had more of an internal impact than a customer impact, he is glad to see it done.

"It was a cloud over FalconStor, but an internal cloud, not external," Knieriemen said. "It's good that FalconStor has this past them and can now focus on the future."

In the settlement reached with the U.S. Attorney’s Office, FalconStor admitted the bribery allegations and agreed to pay a $2.9 million fine. The company will pay an additional $2.9 million in civil penalties related to a civil lawsuit brought by the United States Securities and Exchange Commission.

FalconStor has also agreed to several internal changes, including dividing the roles of CEO and chairman and creating a new chief of compliance officer position. The company also has agreed to revise the FalconStor Code of Conduct and travel and entertainment policies to provide for clear disclosure of all gifts, travel and entertainment.

FalconStor has also agreed to implement new training initiatives, better document all equity grants and revise its compensation procedures.

Albatal said the agreement is actually a win for FalconStor.

"We admitted the charges, but can get them dropped in 18 months if we comply with the terms of the agreement," he said. "That's a win. Another win is there's no monitor. Usually there is. That's a testimony to what we have done since then, including strengthening our internal controls and showing this was an isolated incident."