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Securities Sleuth: Crime and Punishment

Mark McNair
0 Comments|May 16, 2007

More jail sentences may help deter white collar crime.

More jail sentences may help deter white collar crime.

Most corporate executives who engage in fraudulent conduct aren't so concerned as long as they just have to pay a penalty. After all, they probably have more than enough money to pay the fine. With the extraordinary high levels of executive compensation in today's America, for many executives paying a multimillion dollar fine is just a slap on the wrist.

However, going to prison is a different. For some time many have minimized the backdated options scandal, viewing it as a victimless crime or no crime at all. .

That could soon change. The former general counsel of Comverse Technology, Inc. (OTO: CMVT, BullBoards), which should not be confused in any way with the sneaker company, was sentenced to jail last week.

Comverse Technology and its subsidiaries engage in the design, development, manufacture, marketing, and support of software, systems, and related services for multimedia communication and information processing applications.

William F. Sorinl was sentenced to one year and one day in prison last week after pleading guilty in November 2006 to a conspiracy charge in a stock-options backdating scheme. Earlier this year, he settled with the SEC and paid over $3 million in disgorgement.

By no means, however, was what happened at Comverse an isolated incident. Well over one hundred companies are under active investigation for allegations they backdated options. We are investigating three of such companies: Transaction Systems Architects, Inc. (NASDAQ: TSAI, BullBoards), Sonic Solutions (NASDAQ: SNIC, BullBoards) and Active Power Inc. (NASDAQ: ACPW, BullBoards) and if you are an affected investor in any of these companies you may wish to contact us. In each of these cases, when allegations against the company were disclosed, its stock tumbled and hasn't recovered.

Trouble for Sterling Financial Corporation Investors

Sterling Financial Corporation (NASDAQ: SLFI, BullBoards) is a financial services company based in Lancaster, Pennsylvania.

On April 30, before the markets opened, Sterling Financial disclosed "that as a result of information obtained from an internal investigation, it expects to be restating financial statements for the years 2004 through 2006 and is postponing its 2007 annual shareholder meeting."

Upon this announcement, the price of Sterling Financial shares declined from $20.72 per share at the close of trading on April 27, to $16.65 per share, a decline of $4.07 per share, or approximately 20%, on heavier than usual trading volume.

It appears that investors who purchased Sterling Financial between April 27, 2004 and April 27, 2007 may be affected.

Fremont General Corporation Suffers Stock Collapse

Fremont (NYSE: FMT, BullBoards), based in Santa Monica, California, is a financial services company that had engaged in subprime mortgage lending.

The company was recently ordered by the Federal Deposit Insurance Corp. ("FDIC") to, among other things, cease and desist: 1) "Operating without effective risk management policies and procedures in place in relation to the company's brokered subprime mortgage lending and commercial real estate construction lending businesses"; 2) "Operating with inadequate underwriting criteria and excessive risk in relation to the kind and quality of assets held" by the company; 3) "Operating without an accurate, rigorous and properly documented methodology concerning its allowance for loan and lease losses"; 4) "Operating in such a manner as to produce low and unsustainable earnings"; and 5) "Marketing and extending adjustable-rate mortgage ("ARM") products to subprime borrowers in an unsafe and unsound manner that greatly increases the risk that borrowers will default on the loans or otherwise cause losses" to the company.

Fremont has since disclosed that "it intends to exit its sub-prime residential real estate lending operations." Fremont has failed to file its Annual Report on Form 10-K for the fiscal year ended December 31, 2006 on time.

Not surprisingly, Fremont's common stock has plummeted as a result of these disclosures.

Mark McNair is an attorney in private practice who represents investors in securities litigation and was formerly an attorney at the Securities and Exchange Commission. For additional information, go to

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