THE ROSEN LAW FIRM, P.A. Phillip Kim, Esq. (PK...
Transcript of THE ROSEN LAW FIRM, P.A. Phillip Kim, Esq. (PK...
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THE ROSEN LAW FIRM, P.A. Phillip Kim, Esq. (PK 9384) Laurence M. Rosen, Esq. (LR 5733) 275 Madison Avenue, 34th Floor New York, New York 10016 Telephone: (212) 686-1060 Fax: (212) 202-3827 Email: [email protected] Email: [email protected] Lead Counsel for Plaintiffs and Class UNITED STATES DISTRICT COURT EASTERN DISTRICT OF NEW YORK
-------------------------------------------------------------X WILLIAM BURNS and THERESA BLACK, Individually and On Behalf of All Others Similarly Situated, Plaintiffs, v. FALCONSTOR SOFTWARE, INC., REIJANE HUAI, ESTATE OF REIJANE HUAI, JOHN AND JANE DOES, as Fiduciary/Administrator/Executor/Trustee of the ESTATE OF REIJANE HUAI; and JAMES WEBER, Defendants. -------------------------------------------------------------X
No.: 10-CV-4572 (ERK) (CLP) CONSOLIDATED AMENDED COMPLAINT JURY TRIAL DEMANDED
1. Lead Plaintiff William Burns and consolidated plaintiff Theresa Black, (collectively
the “Plaintiffs”) individually and on behalf of all other persons similarly situated, by their
undersigned attorneys, allege in this Consolidated Amended Complaint (the “Complaint”) the
following upon knowledge with respect to their own acts, and upon facts obtained through an
investigation conducted by their counsel, which included, inter alia: (a) review and analysis of
relevant filings made by FalconStor Software, Inc. (“FalconStor” or the “Company”) with the United
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States Securities and Exchange Commission (the “SEC”); (b) review and analysis of defendants’
public documents, conference calls and press releases; (c) review and analysis of court records
relating to the Defendants; (d) review and analysis of securities analysts’ reports and advisories
concerning the Company; (e) information readily obtainable on the Internet; and (f) interviews of
several witnesses with personal knowledge of the relevant facts.
2. Plaintiffs believe that further substantial evidentiary support will exist for the
allegations set forth herein after a reasonable opportunity for discovery. Most of the facts supporting
the allegations contained herein are known only to defendants or are exclusively within their control.
I. NATURE OF THE ACTION
3. This is a federal securities class action on behalf of a class consisting of all persons
other than Defendants who purchased the common stock of FalconStor between March 12, 2008 and
September 29, 2010 (the “Class Period”), inclusive, seeking to recover damages caused by
Defendants’ violations of federal securities laws and pursue remedies under the Securities Exchange
Act of 1934 (the “Exchange Act”).
4. FalconStor develops, manufactures, and sells network storage software solutions in
the United States, and internationally. It also provides related maintenance, implementation, and
engineering services.
5. During the Class Period, the Individual Defendants, CEO, Chairman, and President
ReiJane Huai, and CFO, Treasurer and Vice President James Weber signed and filed with the SEC
materially false and misleading Sarbanes-Oxley Act of 2002 (“SOX”) certifications attesting that
they had disclosed all fraud within the Company to the Company’s auditor and the audit committee.
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6. In truth, Defendants were engaged in an illicit scheme to bribe employees of
JPMorgan Chase & Co. so that such employees would cause JPMorgan to purchase FalconStor’s
products and services.
7. The bribes included FalconStor stock options, restricted stock, cash, gift cards, and
casino trips. The value of the bribes totaled nearly $400,000.
8. Defendants’ bribery succeeded. FalconStor landed JPMorgan as a customer, and
FalconStor signed three separate sales contacts with JPMorgan, amounting to the Company’s largest
ever enterprise license sale. Indeed, FalconStor’s sales to JPMorgan accounted for 15% and 21% of
the Company’s revenue for the first quarter of 2008 and second quarter of 2009, respectively.
9. The bribery scheme was unsustainable. By the fourth quarter ended December 31,
2009, the Company was only able to muster a $1.3 million sales contract—previously it had entered
into contracts totaling $4.99 and $5.90 million. No other contracts were entered into in 2010. As a
result, the Company reported revenue shortfalls in 2010 that caused the Company’s stock to fall -
damaging investors.
10. On September 29, 2010, the Company issued a press release announcing that
defendant Huai had disclosed that certain “improper payments” were made to a FalconStor
customer, that Huai had resigned all his positions from the FalconStor—a company he founded, and
that there was a regulatory and an internal investigation concerning the unspecified “improper
payments.” This announcement shocked the market, causing FalconStor’s stock to lose over a third
of its value.
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11. In the wake of this disclosure, a FalconStor manager, Jie Lin a/k/a Jason Lin (“Lin”)
and a JPMorgan employee, Ted Zahner have plead guilty to violations of the Travel Act to commit
commercial bribery during the period from October 2007 to September 2010.
12. Days before ReiJane Huai was set to plead guilty to a criminal information for
violation of the Travel Act to commit commercial bribery, on September 26, 2011, Huai committed
suicide by shooting himself in his chest in front of his home located in Nassau County, Long Island.
II. JURISDICTION AND VENUE
13. The claims asserted herein arise under and pursuant to Sections 10(b) and 20(a) of the
Exchange Act, (15 U.S.C. §78j(b) and 78t(a)), and Rule 10b-5 promulgated thereunder (17 C.F.R.
§240.10b-5).
14. This Court has jurisdiction over the subject matter of this action pursuant to Section
27 of the Exchange Act (15 U.S.C. §78aa) and 28 U.S.C. § 1331.
15. Venue is proper in this Judicial District pursuant to Section 27 of the Exchange Act,
15 U.S.C. § 78aa and 28 U.S.C. § 1391(b). Many of the acts alleged herein, including the
preparation and dissemination of materially false and misleading information, occurred in substantial
part in this District.
16. In connection with the acts, conduct and other wrongs alleged in this Complaint,
Defendants, directly or indirectly, used the means and instrumentalities of interstate commerce,
including but not limited to, the United States mails, interstate telephone communications and the
facilities of the national securities exchange.
III. PARTIES
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17. Court-appointed Lead Plaintiff William Burns and consolidated named plaintiff
Theresa Black, purchased Falconstor common stock during the Class Period and have suffered
damages as a result. The PSLRA certifications of Plaintiffs have previously been filed with the
Court and are incorporated by reference.
18. Defendant FalconStor, a Delaware Corporation, develops, manufactures, and sells
network storage software solutions in the United States, and internationally. It also provides related
maintenance, implementation, and engineering services. During the Class Period the Company’s
stock was listed on the NASDAQ under ticker “FALC.”
19. Defendant ReiJane Huai (“Huai”) was Chairman, Chief Executive Officer and
President of FalconStor from 2001 until September 29, 2011 when he suddenly resigned all of his
positions within the Company.
Huai’s Death
20. On October 6, 2011, counsel for Huai filed a letter with the Court (docket no. 33)
stating that Huai had committed suicide on September 26, 2011. No
fiduciary/administrator/executor/trustee is listed in the letter. Despite making inquires to Huai’s
counsel and to the Nassau County Surrogate’s Court, as of the date of this Complaint, Plaintiffs have
yet to discover the identity of the fiduciary/administrator/executor/trustee of Huai’s estate. Plaintiffs
were able to confirm that the probate petition was filed with Nassau County Surrogate’s Court on
October 27, 2011.
21. Therefore, Plaintiffs name in this Complaint, as defendants, Huai, the Estate of
ReiJane Huai, and John and Jane Doe fiduciary/administrator/executor/trustee of the Estate of
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ReiJane Huai. When Plaintiffs obtain all the relevant information pertaining to the Estate of ReiJane
Huai, Plaintiffs will seek to substitute the appropriate parties.
Huai’s Criminal Proceeding
22. On September 23, 2011 the government filed a motion for leave to file an information
upon Huai’s waiver of indictment of a felony in this Court in the matter United States of America v.
ReiJane Huai, No. 11-CR-656 (LDW). According to the motion papers, the charges against Huai
involved conspiracy to offer, and the offer and receipt of, commercial bribes in violation of 18 USC
371 and 1952(a).
23. According to news reports issued on September 29, 2009, citing court personnel,
Huai was set to plead guilty to the criminal charges referenced in his motion filed with the Court.
24. Defendant James Weber (“Weber”) was and is FalconStor’s Chief Financial Officer,
Treasurer, and Vice President since February 2004.
25. Huai and Weber are collectively referred to hereinafter as the “Individual
Defendants.”
26. Falconstor is liable for the acts of the Individual Defendants and its employees under
the doctrine of respondeat superior and common law principles of agency as all of the wrongful acts
complained of herein were carried out within the scope of their employment with authorization.
27. The scienter of the Individual Defendants and other employees and agents of the
Company is similarly imputed to Falconstor under respondeat superior and agency principles.
Relevant Nonparties
28. Jie Lin a/k/a/ Jason Lin (“Lin”), was at all relevant times herein the Director of
Regional Sales at FalconStor. On March 16, 2011, Judge Wexler accepted Lin’s guilty plea to a
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two-count information charging (a) violation of 18 USC 371 for conspiracy to violate the Travel Act
and to commit commercial bribery; and (b) violation of 18 USC 1951, extortion. A copy of Lin’s
criminal information is attached hereto as Exhibit 1, and is set forth herein by reference. A copy of
the transcript of Lin’s March 16, 2011 guilty plea hearing is attached hereto as Exhibit 2, and is set
forth herein by reference.
29. Ted Zahner (“Zahner”) was at all relevant times employed by the Global Technology
Infrastructure Division of JPMorgan Chase & Co. On July 5, 2011 Judge Wexler accepted Zahner’s
guilty plea to a criminal information charging conspiracy to violate the Travel Act and to commit
commercial bribery. A copy of the Zahner’s information is attached hereto as Exhibit 3, and is set
forth herein by reference. A copy of the transcript of Zahner’s July 5, 2011 guilty plea hearing is
attached hereto as Exhibit 4, and is set forth herein by reference.
IV. ALLEGATIONS OF WRONGFUL CONDUCT
A. The Undisclosed Bribery and Extortion1
30. During the Class Period, FalconStor entered into at least three lucrative software
licensing sales and services contracts with JPMorgan Chase Bank, N.A. (“JPMorgan”):
a. March 31, 2008: $4.1 million sale of software and $888,000 of related
services;
b. June 26, 2009: $5.9 million sale of software; and
c. November 17, 2009: $1.3 million sale of software.
31. Unbeknownst to investors, these contracts were obtained through illegal bribes paid
by FalconStor. Between October 2007 and continuing through September 2010, FalconStor paid
1 Unless indicated otherwise, the allegations in this section are derived Lin and Zahner’s
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employees of JPMorgan, its parent and various subsidiaries, among others, Zahner, in order to obtain
the three contracts above. The illegal bribery, included, among other things, the following acts:
a. Lin testified at this guilty plea hearing (Ex 2) that on October 12, 2007
FalconStor management had asked him to “take care” of JPMorgan employees in Hong
Kong and Macau, “meaning to provide bribery in the casino in Macau.” Lin testified that
FalconStor’s General Manager of Asia Pacific, Eric Chen, gave him $35,000 of American
Express travelers’ checks for the bribery;
b. According to Lin’s criminal information (Ex. 1), on or about March 7, 2009,
Lin sent an email to a “FalconStor manager,” who Lin identified as defendant Huai at his
guilty plea hearing (Ex . 2), regarding payment of stock options as a bribe to a JPMorgan
employee. According to Zahner’s criminal information on or about March 9, 2009, Zahner
arranged for his brother to be granted 25,000 FalconStor stock options;
c. On or about May 12, 2009, Lin went to Las Vegas to establish and deposit
money into a casino gaming account to used to pay bribes to JPMorgan employees;
d. On or about April 6, 2010, Lin emailed an unnamed executive at FalconStor,
regarding the transfer of FalconStor restricted shares to a JPMorgan employee as a bribe.
Upon information and belief, this unnamed executive was Huai—Huai was the person
whom Lin had requested cause FalconStor issue the stock options as a bribe, above; and
e. Zahner derived the following economic benefits from the bribes he received
from FalconStor: (1) $125,900 in FalconStor stock options and restricted shares; (2) $7,000
in for gambling and other additional entertainment fees in Macau, China; (3) $10,000 in cash
criminal information and guilty plea hearing transcript, attached hereto as Exhibits 1-4.
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payments; (4) $26,000 down payment toward the purchase of property; (5) $5,892
membership fees to a country club; and (6) $10,000 in gift cards.
32. FalconStor admitted that these JP Morgan sales contracts were extremely material to
FalconStor’s financial results as they represented a material portion of FalconStor’s sales. For
example:
a. In the Company’s 10-Q for the first quarter ended March 31, 2008, filed with
the SEC on May 9, 2008, FalconStor stated that the sales contract it signed with JPMorgan
Chase (i.e., the $4.1 million contract entered into on March 31, 2008) “accounted for 15% of
our revenues for the quarter. This is the largest enterprise license that we have entered to
date”; and
b. In the Company’s 10-Q for the second quarter ended June 30, 2009, filed with
the SEC on August 7, 2009, FalconStor stated: “[d]uring the quarter, JPMorgan Chase
licensed additional software to expand the scope of their use of our software license
agreement they signed with us in the first quarter of 2008. JPMC accounted for 21% of
revenues in the second quarter. This is the largest enterprise license that we have entered
into to date.”
33. In addition to the undisclosed bribery, between September 20, 2010 and September
29, 2010, Lin attempted to extort defendant Huai in connection with Huai’s involvement in the
bribery. Lin testified at his guilty plea hearing that his extortion of Huai concerned “[Huai]’s
involvement of [sic] the bribery in the past three years.” As part of the extortion, Huai met with Lin
and gave Lin a $160,000 cashiers’ check.
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34. On September 29, 2010, FalconStor issued a press release admitting that “improper
payments” were made to an undisclosed customer and as a result defendant Huai resigned all his
positions with the Company. The announcement states in relevant part:
FalconStor President, CEO and Chairman of the Board ReiJane Huai Resigns MELVILLE, N.Y., September 29, 2010—FalconStor Software, Inc. (NASDAQ: FALC) today announced that its President, Chief Executive Officer and Chairman of the Board, ReiJane Huai, resigned from all of his positions with the Company, effective immediately.
The Board accepted Mr. Huai’s resignation and appointed Eli Oxenhorn, (current board member), as non-executive Chairman of the Board, James McNiel (current Chief Strategy Officer) as interim Chief Executive Officer and interim President, and James Weber (current Chief Financial Officer) as Chief Financial Officer and interim Chief Operating Officer.
Mr. Huai tendered his resignation following his disclosure that certain improper payments were allegedly made in connection with the Company’s contract with one customer.
The Company has fully cooperated with law enforcement authorities with respect to the ongoing investigation, and it will continue to do so. In addition, a special committee of the Board has been formed to conduct a full internal investigation of these matters and the special committee has retained counsel to assist it in its investigation.
B. False Statements to Investors
35. The Class Period begins on March 12, 2008 when the Company filed its annual report
for the fiscal year ended December 31, 2007 on Form 10-K with the SEC. Attached to the 10-K
were certifications pursuant to the Sarbanes-Oxley Act of 2002 (“SOX”) separately executed by
defendants Huai and Weber.
36. Huai and Weber’s SOX certifications falsely stated that Huai and Weber had each
disclosed “any fraud, whether or not material” to Falconstor’s auditor and its audit committee.
37. The SOX certifications of both Huai and Weber state, in relevant part:
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I, …., certify that:
* * *
5. The registrant’s other certifying officer and I have disclosed, based on our most recent evaluation of internal control over financial reporting, to the registrant’s auditors and the audit committee of the registrant’s board of directors (or persons performing the equivalent functions): a) all significant deficiencies and material weaknesses in the design or operation of internal control over financial reporting which are reasonably likely to adversely affect the registrant’s ability to record, process, summarize and report financial information; and b) any fraud, whether or not material, that involves management or other employees who have a significant role in the registrant’s internal control over financial reporting.
38. The SOX certifications of Huai and Weber were false when made, because
FalconStor was engaged in an illegal and fraudulent bribery scheme with the active participation,
approval, knowledge and complicity of both Huai and Weber in order to procure sales contracts with
JPMorgan, as set forth in ¶¶ 30-34, above. Huai and Weber did not disclose the bribery to
FalconStor’s auditor or audit committee at the time the SOX certifications were signed, because had
they disclosed the bribes to the Company’s auditor, under Section 10A of the Exchange Act, the
auditors would have demanded remedial action, i.e. stop the bribes. If remedial action was not
taken, the auditors would resign or furnish their findings to the SEC. In either circumstance, an 8-K
would have been filed with the SEC detailing the reasons for the resignation or providing the report
if there was no such resignation.
39. The bribery scheme permitted FalconStor to inflate the value of its share price
through the recording of revenue earned obtained through the bribery.
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40. Had the fraudulent scheme to inflate earnings been disclosed, investors would have
known that FalconStor’s revenues were based on criminal misconduct and that absent this criminal
conduct, FalconStor’s revenue would be materially lower. In short, the real value of FalconStor
stock was much lower than Defendants had led investors to believe.
41. Defendants Huai and Weber each signed and filed ten more substantially identical
SOX certifications as part of the following periodic reports, which were each false and misleading
for the same reasons the March 12, 2008 SOX certifications of Huai and Weber filed with the SEC
were false and misleading as noted above.
a. First Quarter ended March 31, 2008, filed with the SEC on May 9, 2008;
b. Second Quarter ended June 30, 2008, filed with the SEC on August 11, 2008;
c. Third Quarter ended September 30, 2008, filed with the SEC on November 7,
2008;
d. Fourth Quarter and Fiscal Year ended December 31, 2008, filed with the SEC
on March 12, 2009;
e. First Quarter ended March 31, 2009, filed with the SEC on May 11, 2009;
f. Second Quarter ended June 30, 2009, filed with the SEC on August 7, 2009;
g. Third Quarter September 30, 2009, filed with the SEC on November 6, 2009;
h. Fourth Quarter and Fiscal Year ended December 31, 2009, filed with the SEC
on March 12, 2010;
i. First Quarter ended March 31, 2010, filed with the SEC on May 7, 2010; and
j. Second Quarter ended June 30, 2010, filed with SEC on August 6, 2010.
V. ADDITIONAL ALLEGATIONS DEMONSTRATING FALSITY AND SCIENTER
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42. The nature and extent of the bribery and extortion involving awards of FalconStor
stock options and restricted stock, cash payments, casino trips to Macau and Las Vegas,
establishment of casino accounts, and other consideration totaling nearly $400,000 could not have
been accomplished without (a) the knowing participation of Weber, the Company’ CFO and
Treasurer; or (b) Weber’s reckless indifference to the scheme.
43. That the JPMorgan contract was the Company’s largest enterprise license ever and
accounted for significant portion of FalconStor’s revenue supports a strong inference that Weber and
Huai each had knowledge of, or recklessly disregarded facts showing, how the contracts were
obtained. For second quarter ended June 30, 2009 the contracts represented 21% of the Company’s
revenue. In the second quarter ended June 30, 2008, the contracts represented 15% of Company’s
revenue.
44. Despite the fact that Lin testified at his guilty plea hearing that he paid bribes to
JPMorgan employees in October 2007 under the direction of, among others, Eric Chen, and that Eric
Chen had given Lin $35,000 in American Express travelers check for the bribes, FalconStor’s
website states that Eric Chen is still employed at FalconStor.
http://www.falconstor.com/company/about-falconstor/executives (last checked November 2, 2011).
45. Both Huai and Weber separately lied to the Company’s auditor, KPMG, in each
Management Representation letter they were each required to sign and submit to KPMG in
connection with KPMG’s audit of FalconStor in an effort to conceal the bribery scheme. Under
Statement on Auditing Standards No. 85 (“SAS 85”), the Management Representation letter should
cover all periods covered by the auditor’s report. Management Representation letters are used to
provide information to the auditors about matters that cannot be objectively tested because they
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depend on management’s knowledge, such as management’s intentions and the completeness of
information provided to the auditor. The standard Management Representation letter required Huai
and Weber to separately certify to KPMG, among other things, (a) Huai and Weber have no
knowledge of any fraud or suspected fraud affecting the entity involving management; (b) that there
are no violations of law or regulations whose effects should be considered for disclosure in the
financial statements; and (c) they have no knowledge of any allegations of fraud or suspected fraud
affecting the entity received in communications from employees, former employees, analysts,
regulators, short sellers, or others.
VI. TRUTH SLOWLY MATERIALIZES DAMAGING INVESTORS
46. On January 14, 2010 the Company issued a press release announcing its preliminary
fourth quarter and full year results ended December 31, 2008. The Company reported preliminary
“fourth quarter revenue to be in the range of $21.5 to $22.0 million, and non-GAAP net loss per
share to be between $0.02 and $0.03 per share”—far below the range the Company had told
investors as recently as July 28, 2009. With respect to the admitted “revenue shortfall”, the
announcement states in relevant part:
The revenue shortfall in 2009 was mainly the result of lower than expected software license revenue from OEMs. On a year over year basis, gross software license revenue from OEMs decreased by approximately 24%, or $6.7 million. Three OEMs were responsible for most of this shortfall. During the fourth quarter of 2009, Hewlett Packard announced it was acquiring 3Com, the parent of H3C, one of the Company’s OEMs. The change of ownership caused a change in H3C’s historical licensing practices that resulted in revenue from H3C that was over $2 million lower in Q4 on a year over year basis. The ongoing delay of the proposed merger of Sun Microsystems, another of the Company’s OEMs, into Oracle, resulted in a shortfall in projected revenue from Sun. Revenues from EMC, our largest customer, were also below our expectations. 47. While the Company admitted that the revenue shortfall was caused “mainly” for the
above reasons, the revenue shortfall was caused and/or materialized through the diminishing and
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unsustainable revenue generated from the alleged bribery scheme. While the bribery was successful
in obtaining a $5.9 million contract by June 26, 2009, by Fourth Quarter of 2009 the Company was
only able to sign a $1.3 million sales contract with JPMorgan on November 17, 2009.
48. Thus, because the bribery scheme became less effective in obtaining contracts,
FalconStor failed to meet the earnings projections that it had made to investors. Instead, its earnings
began to drop substantially as the bribery scheme unraveled.
49. The January 14, 2010 press release, issued after market close, caused the Company’s
stock to fall $.80/share (or 17.8%) to $3.69/share on January 15, 2010, and declining to $3.49/share
by January 20, 2010.
50. On April 19, 2010 the Company issued a press release announcing its preliminary
results for the first quarter ended March 31, 2010. In the announcement the Company admitted
it would have another “revenue shortfall” on “lower than expected software license revenue.”
Defendant Huai, commenting on the preliminary results stated, in relevant part:
The revenue shortfall was a result of lower than expected software license revenue. In particular, international software license revenue was down on a year over year basis.
51. The revenue shortfall was resulted from the diminishing and unsustainable returns
from the alleged bribery scheme. FalconStor did not sign any new contracts with JP Morgan in
the first quarter of 2010 and the most recent contract in November 2009 was for a fraction of the
initial two contracts with JP Morgan. Because the bribery scheme became less effective in
obtaining contracts, FalconStor failed to meet the earnings projections that it had made to
investors. Instead, its earnings began to drop substantially as the bribery scheme unraveled.
This announcement, made after market close, caused the Company’s stock to fall $.14/share (or
4.3%) to $3.12/share on April 20, 2010.
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52. On September 29, 2009 the Company issued a press release disclosing for the first
time existence of “improper payments” to a customer and governmental investigations and an
internal investigation relating to the improper payments. The announcement also revealed that Huai
had resigned. The press release states in relevant part:
FalconStor President, CEO and Chairman of the Board ReiJane Huai Resigns
MELVILLE, N.Y., September 29, 2010—FalconStor Software, Inc. (NASDAQ: FALC) today announced that its President, Chief Executive Officer and Chairman of the Board, ReiJane Huai, resigned from all of his positions with the Company, effective immediately.
The Board accepted Mr. Huai’s resignation and appointed Eli Oxenhorn, (current board member), as non-executive Chairman of the Board, James McNiel (current Chief Strategy Officer) as interim Chief Executive Officer and interim President, and James Weber (current Chief Financial Officer) as Chief Financial Officer and interim Chief Operating Officer.
Mr. Huai tendered his resignation following his disclosure that certain improper payments were allegedly made in connection with the Company’s contract with one customer.
The Company has fully cooperated with law enforcement authorities with respect to the ongoing investigation, and it will continue to do so. In addition, a special committee of the Board has been formed to conduct a full internal investigation of these matters and the special committee has retained counsel to assist it in its investigation.
53. This announcement caused the Company’s stock to fall to $.91/share (or 22.4%) to
$3.15/share on September 29, 2010, and a caused the Company’s stock to fall an additional
$.29/share the next three trading days.
VII. PLAINTIFFS’ CLASS ACTION ALLEGATIONS
54. Plaintiffs bring this action as a class action pursuant to Federal Rules of Civil
Procedure 23(a) and (b)(3) on behalf of a Class, consisting of all persons who purchased the
common stock of FalconStor during the Class Period and who were damaged thereby. Excluded
from the Class are Defendants, the officers and directors of the Company at all relevant times,
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members of their immediate families and their legal representatives, heirs, successors or assigns and
any entity in which Defendants have or had a controlling interest.
55. The members of the Class are so numerous that joinder of all members is
impracticable. Throughout the Class Period, FalconStor’s common stock was actively traded on the
NASDAQ. While the exact number of Class members is unknown to Plaintiffs at this time and can
only be ascertained through appropriate discovery, Plaintiffs believe that there are at least hundreds
of members in the proposed Class. Members of the Class may be identified from records maintained
by FalconStor or its transfer agent and may be notified of the pendency of this action by mail, using
a form of notice customarily used in securities class actions.
56. Plaintiffs’ claims are typical of the claims of the members of the Class, as all
members of the Class are similarly affected by Defendants’ wrongful conduct in violation of federal
law that is complained of herein.
57. Plaintiffs will fairly and adequately protect the interests of the members of the Class
and has retained counsel competent and experienced in class and securities litigation.
58. Common questions of law and fact exist as to all members of the Class and
predominate over any questions solely affecting individual members of the Class. Among the
questions of law and fact common to the Class are:
a. whether the federal securities laws were violated by Defendants' acts as
alleged herein;
b. whether statements made by Defendants to the investing public during the
Class Period misrepresented material facts about the business, operations and management
of FalconStor; and
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c. to what extent the members of the Class have sustained damages, and the
proper measure of damages.
59. A class action is superior to all other available methods for the fair and efficient
adjudication of this controversy since joinder of all members is impracticable. Furthermore, as the
damages suffered by individual Class members may be relatively small, the expense and burden of
individual litigation make it impossible for members of the Class to redress individually the wrongs
done to them. There will be no difficulty in the management of this action as a class action.
VIII. PRESUMPTION OF RELIANCE: FRAUD ON THE MARKET DOCTRINE
60. At all relevant times, the market for FalconStor common stock was an efficient
market for the following reasons, among others:
d. FalconStor’s stock met the requirements for listing, and was listed and
actively traded on the NASDAQ, a highly efficient and automated market;
e. As of reported in the Company’s fiscal year 2008 10-K, there was 44,963,392 shares
of FalconStor common stock outstanding. The public float (shares not held by insiders/defendants)
was about 34,900,000 for the same period;
f. During the Class Period, on average, 1,144,543 shares of FalconStor stock were
traded on a weekly basis. Approximately 3.28% of the public float and 2.55% of the shares
outstanding, were bought and sold on a weekly basis, demonstrating a strong presumption of an
efficient market;
g. During the Class Period FalconStor was eligible to file short-form registration
statements with the SEC on Form S-3;
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h. FalconStor was followed by several securities analysts employed by
major brokerage firms, including Canaccord Adam, Morgan Keegan, ThinkPanmure,
Matrix, and Noble Financial (among others), who wrote reports that were distributed to
the sales force and certain customers of their respective brokerage firms during the Class
Period. Each of these reports was publicly available and entered the public marketplace;
i. Over fifty NASD member firms were active market-makers in FalconStor
stock at all times during the Class Period; and
j. Unexpected material news about FalconStor was rapidly reflected and
incorporated into the Company’s stock price during the Class Period.
61. As a result of the foregoing, the market for FalconStor’s common stock promptly
digested current information regarding FalconStor from all publicly available sources and reflected
such information in FalconStor’s stock price. Under these circumstances, all purchasers of
FalconStor’s common stock during the Class Period suffered similar injury through their purchase of
FalconStor’s common stock at artificially inflated prices, and a presumption of reliance applies.
IX. FIRST CLAIM Violation of Section 10(b) of
The Exchange Act and Rule 10b-5 Promulgated Thereunder Against All Defendants
62. Plaintiffs repeat and reallege each and every allegation contained above as if fully set
forth herein.
63. During the Class Period, Defendants carried out a plan, scheme and course of conduct
which was intended to and, throughout the Class Period, did: (1) deceive the investing public,
including Plaintiffs and other Class members, as alleged herein; and (2) cause Plaintiffs and other
members of the Class to purchase FalconStor’s securities at artificially inflated prices. In
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furtherance of this unlawful scheme, plan and course of conduct, Defendants, and each of them, took
the actions set forth herein.
64. Defendants (a) employed devices, schemes, and artifices to defraud; (b) made untrue
statements of material fact and/or omitted to state material facts necessary to make the statements
not misleading; and (c) engaged in acts, practices, and a course of business that operated as a fraud
and deceit upon the purchasers of the Company’s securities in an effort to maintain artificially high
market prices for FalconStor’s securities in violation of Section 10(b) of the Exchange Act and Rule
10b-5 promulgated thereunder. All Defendants are sued either as primary participants in the
wrongful and illegal conduct charged herein or as controlling persons as alleged below.
65. Defendants, individually and in concert, directly and indirectly, by the use, means or
instrumentalities of interstate commerce and/or of the mails, engaged and participated in a
continuous course of conduct to conceal adverse material information about the business, operations
and future prospects of FalconStor as specified herein.
66. These Defendants employed devices, schemes, and artifices to defraud while in
possession of material adverse non-public information, and engaged in acts, practices, and a course
of conduct as alleged herein in an effort to assure investors of FalconStor’s value and performance
and continued substantial growth, which included the making of, or participation in the making of,
untrue statements of material facts and omitting to state material facts necessary in order to make the
statements made about FalconStor and its business operations and future prospects in the light of the
circumstances under which they were made, not misleading, as set forth more particularly herein,
and engaged in transactions, practices and a course of business that operated as a fraud and deceit
upon the purchasers of FalconStor’s securities during the Class Period.
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67. Each of the Individual Defendants’ primary liability, and controlling person liability,
arises from the following facts: (a) the Individual Defendants were high-level executives, directors,
and/or agents at the Company during the Class Period and members of the Company’s management
team or had control thereof; (b) each of these Defendants, by virtue of his responsibilities and
activities as a senior officer and/or director of the Company, was privy to and participated in the
creation, development and reporting of the Company=s financial condition; (c) each of these
Defendants enjoyed significant personal contact and familiarity with the other Defendants and was
advised of and had access to other members of the Company’s management team, internal reports
and other data and information about the Company’s finances, operations, and sales at all relevant
times; and (d) each of these Defendants was aware of the Company’s dissemination of information
to the investing public which they knew or recklessly disregarded was materially false and
misleading.
68. Defendants had actual knowledge of the misrepresentations and omissions of material
facts set forth herein, or acted with reckless disregard for the truth in that they failed to ascertain and
to disclose such facts, even though such facts were available to them. Such Defendants’ material
misrepresentations and/or omissions were done knowingly or recklessly and for the purpose and
effect of concealing FalconStor’s operating condition and business from the investing public and
supporting the artificially inflated price of its securities. As demonstrated by Defendants’
overstatements and misstatements of the Company’s financial condition throughout the Class Period,
Defendants, if they did not have actual knowledge of the misrepresentations and omissions alleged,
were reckless in failing to obtain such knowledge by deliberately refraining from taking those steps
necessary to discover whether those statements were false or misleading.
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69. As a result of the dissemination of the materially false and misleading information
and failure to disclose material facts, as set forth above, the market price of FalconStor’s securities
was artificially inflated during the Class Period. In ignorance of the fact that market prices of
FalconStor’s publicly-traded securities were artificially inflated, and relying directly or indirectly on
the false and misleading statements made by Defendants, or upon the integrity of the market in
which the common stock trades, and/or on the absence of material adverse information that was
known to or recklessly disregarded by Defendants but not disclosed in public statements by
Defendants during the Class Period, Plaintiffs and the other members of the Class acquired
FalconStor securities during the Class Period at artificially high prices and were or will be damaged
thereby.
70. At the time of said misrepresentations and omissions, Plaintiffs and other members of
the Class were ignorant of their falsity, and believed them to be true. Had Plaintiffs and the other
members of the Class and the marketplace known the truth regarding FalconStor’s business and
operating condition, which was not disclosed by Defendants, Plaintiffs and other members of the
Class would not have purchased or otherwise acquired their FalconStor securities, or, if they had
acquired such securities during the Class Period, they would not have done so at the artificially
inflated prices that they paid.
71. By virtue of the foregoing, Defendants have violated Section 10(b) of the Exchange
Act, and Rule 10b-5 promulgated thereunder.
72. As a direct and proximate result of Defendants’ wrongful conduct, Plaintiffs and the
other members of the Class suffered damages in connection with their respective purchases and sales
of the Company’s securities during the Class Period.
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73. This action was filed within two years of discovery of the fraud and within five years
of each plaintiff’s purchases of securities giving rise to the cause of action.
X. SECOND CLAIM Violation of Section 20(a) of
The Exchange Act Against the Individual Defendants
74. Plaintiffs repeat and reallege each and every allegation contained above as if fully set
forth herein.
75. The Individual Defendants acted as controlling persons of FalconStor within the
meaning of Section 20(a) of the Exchange Act as alleged herein. By virtue of their high-level
positions, agency, ownership and contractual rights, and participation in and/or awareness of the
Company’s operations and/or intimate knowledge of the false financial statements filed by the
Company with the SEC and disseminated to the investing public, the Individual Defendants had the
power to influence and control, and did influence and control, directly or indirectly, the decision-
making of the Company, including the content and dissemination of the various statements that
Plaintiffs contend are false and misleading. The Individual Defendants were provided with or had
unlimited access to copies of the Company’s reports, press releases, public filings and other
statements alleged by Plaintiffs to have been misleading prior to and/or shortly after these statements
were issued and had the ability to prevent the issuance of the statements or to cause the statements to
be corrected.
76. In particular, each of these Defendants had direct and supervisory involvement in the
day-to-day operations of the Company and, therefore, is presumed to have had the power to control
or influence the particular transactions giving rise to the securities violations as alleged herein, and
exercised the same.
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77. As set forth above, FalconStor and the Individual Defendants each violated Section
10(b), and Rule 10b-5 promulgated thereunder, by their acts and omissions as alleged in this
Complaint.
78. By virtue of their positions as controlling persons, the Individual Defendants are
liable pursuant to Section 20(a) of the Exchange Act. As a direct and proximate result of
Defendants’ wrongful conduct, Plaintiffs and other members of the Class suffered damages in
connection with their purchases of the Company’s securities during the Class Period.
79. This action was filed within two years of discovery of the fraud and within five years
of each Plaintiff’s purchases of securities giving rise to the cause of action.
WHEREFORE, Plaintiffs pray for relief and judgment, as follows:
(a) Determining that this action is a proper class action, certifying Plaintiffs as a class
representative under Rule 23 of the Federal Rules of Civil Procedure and Plaintiffs’ counsel as Class
Counsel;
(b) Awarding compensatory damages in favor of Plaintiffs and the other Class
members against all Defendants, jointly and severally, for all damages sustained as a result of
Defendants’ wrongdoing, in an amount to be proven at trial, including interest thereon;
(c) Awarding Plaintiffs and the Class their reasonable costs and expenses incurred in
this action, including counsel fees and expert fees; and
(d) Such other and further relief as the Court may deem just and proper.
JURY TRIAL DEMANDED
Plaintiffs hereby demand a trial by jury.
Dated: November 3, 2011 Respectfully submitted,
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THE ROSEN LAW FIRM, P.A.
_____/s/ Phillip Kim_________________ Phillip Kim, Esq. (PK 9384) Laurence Rosen, Esq. (LR 5733) 275 Madison Avenue, 34th Floor New York, NY 10016 Phone: (212) 686-1060 Fax: (212) 202-3827 Email: [email protected] Email: [email protected] Lead Counsel for Plaintiffs and Class
Case 1:10-cv-04572-ERK-CLP Document 36 Filed 11/03/11 Page 25 of 26 PageID #: 393
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CERTIFICATE OF SERVICE I hereby certify that on this on the 3rd day of November, 2011, a true and correct copy of the foregoing document was served by CM/ECF to the parties registered to the Court’s CM/ECF system.
/s/ Phillip Kim
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EXHIBIT 1
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EXHIBIT 2
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HARRY RAPAPORT, CERTIFIED REALTIME REPORTEROFFICIAL COURT REPORTER
1UNITED STATES DISTRICT COURTEASTERN DISTRICT OF NEW YORK
-------------------------------X
UNITED STATES OF AMERICA, : CR 11 00135
v. : U.S. CourthouseCentral Islip, N.Y.
JIE LIN, :TRANSCRIPT OF PLEA
Defendant. :March 16, 2011
-------------------------------X 12:30 p.m.
BEFORE:
HONORABLE LEONARD D. WEXLER, U.S.D.J.
APPEARANCES:
For the Government: LORETTA E. LYNCHUnited States Attorney100 Federal PlazaCentral Islip, New York 11722By: PATRICK SINCLAIR, ESQ.
Assistant U.S. Attorney
For the Defendant: HUGH H. MO, ESQ.
Court Reporter: HARRY RAPAPORT, C.S.R.United States District Court100 Federal PlazaCentral Islip, New York 11722(631) 712-6105
Proceedings recorded by mechanical stenography.Transcript produced by computer-assisted transcription.
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HARRY RAPAPORT, CERTIFIED REALTIME REPORTEROFFICIAL COURT REPORTER
2THE CLERK: United States against gee lip, CR 11
135.
MR. SINCLAIR: Patrick Sinclair.
MR. MO: Hugh H. Mo.
MR. SINCLAIR: Good morning, your Honor.
We are on for a plea here.
We have submitted documents to the Court in
advance, including information, a written agreement
between the parties and the Court's standard plea
agreement, as well as a written waiver of indictment.
THE COURT: Defendant, would you raise your
right hand.
(The defendant is sworn.)
THE COURT: Your name, please.
THE DEFENDANT: Jie, last name, L-I-N.
THE COURT: Now I'm looking for my plea
agreement. Here it is.
You went through my plea agreement with your
attorney. And is that your signature on the last page,
and your attorney's signature?
THE DEFENDANT: That's correct.
THE COURT: Okay.
I'm going to ask you the exact same questions,
and probably the exact -- in the exact same order that you
filled out this questionnaire.
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HARRY RAPAPORT, CERTIFIED REALTIME REPORTEROFFICIAL COURT REPORTER
3You know what the questions are and you know
what the answers are.
Before accepting your plea, there are a number
of questions I must ask to assure it is a valid plea.
If you do not understand any of the questions
say so and I will reword the question.
You understand having been sworn, your answers
to my questions are subject to the penalties of perjury
and making a false statement if you do not answer
truthfully?
Understand that?
THE DEFENDANT: Yes.
THE COURT: What is your full name?
THE DEFENDANT: Jie Lin.
THE COURT: Had you old are you?
THE DEFENDANT: 45.
THE COURT: Are you a citizen of the United
States?
THE DEFENDANT: Yes.
THE COURT: What is the highest schooling you
attained?
THE DEFENDANT: Some ledge.
THE COURT: What college?
THE DEFENDANT: Queens College.
THE COURT: Which?
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HARRY RAPAPORT, CERTIFIED REALTIME REPORTEROFFICIAL COURT REPORTER
4THE DEFENDANT: Queens College.
THE COURT: Are you presently under the care of
a physician or psychiatrist?
THE DEFENDANT: No.
THE COURT: In the past twenty-four hours have
you taken any narcotic drugs, medicine, pills or drunk any
alcoholic beverage?
THE DEFENDANT: No.
THE COURT: Have you ever been hospitalized or
treated for narcotics addiction?
THE DEFENDANT: No.
THE COURT: Is your mind clear?
THE DEFENDANT: Yes.
THE COURT: You understand what is going on?
THE DEFENDANT: Yes.
THE COURT: I will ask your lawyer.
Have you discussed this matter with your client?
MR. MO: Yes, your Honor.
THE COURT: Does he understand the rights that
he is waiving by pleading guilty?
MR. MO: Yes, your Honor.
THE COURT: Is he capable of understanding the
nature of these proceeding?
MR. MO: Yes, your Honor.
THE COURT: Do you have any doubt as to the
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HARRY RAPAPORT, CERTIFIED REALTIME REPORTEROFFICIAL COURT REPORTER
5defendant's competency to plead at this time?
MR. MO: No, your Honor.
THE COURT: You put "yes", and I will change it
to "no", with your permission.
MR. MO: Yes, Judge.
THE COURT: Defendant, you have a right to plead
not guilty, you understand that?
THE DEFENDANT: Understand.
THE COURT: If you plead not guilt under the
constitution and laws of the United States you are
entitled to a speedy and public trial by jury with the
assistance of counsel on the charges.
You understand that?
THE DEFENDANT: Understand.
THE COURT: At the trial you would be presumed
to be innocent, and the government would have to overcome
that presumption to prove guilt by competent evidence
beyond a reasonable doubt, and you do not have to prove
your innocence. If the government failed the jury would
have the duty to find not guilty.
Understand?
THE DEFENDANT: Understand.
THE COURT: In the course of the trial the
witnesses for the government would have to come to court
and testify in your presence and your counsel has the
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HARRY RAPAPORT, CERTIFIED REALTIME REPORTEROFFICIAL COURT REPORTER
6right to cross-examine the witnesses for the government,
object to evidence offered by the government and offer in
evidence in your behalf.
You understand?
THE DEFENDANT: Yes.
THE COURT: At the trial while you have the
right to testify if you chose to do so, you would not be
required to testify. Under the Constitution of the United
States you cannot be compelled to incriminate yourself.
If you decided not to testify the Court will instruct the
jury not to hold that against you.
You understand that?
THE DEFENDANT: Understand.
THE COURT: If you plead guilty and if I accept
the plea you would be giving up your constitutional rights
to a trial and the other rights I have just discussed.
There would be no further trial of any kind, no right to
appeal or collaterally attack at any time whether you are
guilty or not. A judgment of guilt will be entered on the
basis of your guilty plea, which judgment can never be
changed.
You understand that?
THE DEFENDANT: Understand.
THE COURT: Let me ask the government.
What are the rights of appeal in your agreement
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HARRY RAPAPORT, CERTIFIED REALTIME REPORTEROFFICIAL COURT REPORTER
7with the defendant?
MR. SINCLAIR: The agreement doesn't address any
rights of appeal, your Honor.
THE COURT: So you still have the right to
appeal my sentence, but not the fact that you are guilty
or not guilty. If you enter into the plea of guilty that
stays and you have no right to appeal. But you do have
the right to appeal -- no, you have a right to appeal
anything.
MR. SINCLAIR: That's correct. There is nothing
in the agreement.
THE COURT: You have a right to appeal. If you
feel I'm wrong on something you can appeal. So, it is not
limited.
If you plead guilty I will have to ask you
questions what you did in order to satisfy myself that you
are guilty of the charges to which you seek to plea guilt.
You will have to answer my questions and acknowledge your
guilt, thus you will be giving up the right not to
incriminate yourself.
You understand?
THE DEFENDANT: Understand.
THE COURT: Are you willing to give up your
rights to a trial and the other rights I have just
discussed?
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HARRY RAPAPORT, CERTIFIED REALTIME REPORTEROFFICIAL COURT REPORTER
8THE DEFENDANT: Yes.
THE COURT: I will ask the government first,
what is the defendant pleading guilty to?
THE DEFENDANT: A two-count information
charging conspiracy and in violation of 18 United States
Code 371 for conspiracy to violate the Travel Act and
commit commercial bribery. And the second count is a
violation of 18 United States Code, 1951, extortion.
THE COURT: What agreement is there concerning
plea and sentence?
MR. SINCLAIR: There is a written agreement
between the parties that does not set forth any agreement
with respect to sentence. The defendant understands by
virtue of that agreement that the Court will set the
sentence and the defendant is agreeing to plead guilty to
both the aforementioned counts, both the Travel Act
conspiracy and the extortion count, your Honor.
THE COURT: Sidebar.
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HARRY RAPAPORT, CERTIFIED REALTIME REPORTEROFFICIAL COURT REPORTER
9.
(Whereupon, at this time the following took
place at the sidebar.)
THE COURT: I see in the plea agreement --
MR. MO: There is a cooperation agreement
entered.
THE COURT: I will not say anything about it.
MR. MO: The courtroom is not sealed and I don't
want any mention of it.
THE COURT: That is why I called you up. I
didn't go into it.
(Whereupon, at this time the following takes
place in open court.)
THE COURT: I will ask the government to explain
to the defendant what elements they would have to prove in
respect to these two counts. First on conspiracy to the
Travel Act, what elements would you have to prove to a
jury beyond a reasonable doubt?
MR. SINCLAIR: The government would be obligated
to prove that the defendant had an agreement with others
and that agreement provided that he was to travel in
interstate commerce and carry on activities in violation
of the New York State commercial bribery law, which
involves the conferring of a benefit on an employee of the
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HARRY RAPAPORT, CERTIFIED REALTIME REPORTEROFFICIAL COURT REPORTER
10company without the consent of the employee's company,
with the intent to influence that employee's conduct, and
the value of that bribe exceeds $1,000, and the employer
company is harmed by more than $250.
Pursuant to the conspiracy law, we have to prove
that the defendant took at least one overt act in
furtherance of that conspiracy.
THE COURT: With respect to the count two,
extortion, what would the government have to prove there?
MR. SINCLAIR: The government would have to
prove beyond a reasonable doubt that the defendant
attempted to obtain money from another person with
consent, but which consent was gained by wrongful use of
fear, and as a result of this extortion interstate
commerce was affected.
THE COURT: I will ask the defendant, are you
now aware of the elements of the crimes to which you are
charged, which you are about to plead guilty to? Do you
understand it?
THE DEFENDANT: Yes.
THE COURT: Have you discussed with your lawyer
the charges in the information to which you are pleading
guilty to?
THE DEFENDANT: Yes.
THE COURT: And do you understand what you are
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HARRY RAPAPORT, CERTIFIED REALTIME REPORTEROFFICIAL COURT REPORTER
11pleading guilty to?
THE DEFENDANT: Yes, I understand.
THE COURT: What is the maximum sentence that
the Court could impose under each of these counts?
MR. SINCLAIR: The maximum term of
imprisonment --
THE COURT: I'm asking if the defendant knows?
Do you know?
THE DEFENDANT: Yes.
THE COURT: What are they?
THE DEFENDANT: Count one, maximum five years;
on count two, 20 years.
THE COURT: Also there is a $100 special
assessment on each count. And there is supervised release
of three years on each count.
Do you understand that?
THE DEFENDANT: Yes.
MR. SINCLAIR: Have you discussed the sentencing
guidelines with your attorney?
THE DEFENDANT: Yes, I did.
THE COURT: Do you understand the sentencing
guidelines are no longer mandatory, but the District Court
is required to consider the applicable guideline range
along with the facts listed in 18 USC 3553(a)? You
understand?
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HARRY RAPAPORT, CERTIFIED REALTIME REPORTEROFFICIAL COURT REPORTER
12THE DEFENDANT: Understand.
THE COURT: Has your attorney explained the
facts listed in 18 USC 3553(a)?
THE DEFENDANT: I understand. Yes.
THE COURT: Do you have any questions you would
like to ask me about this charge, the rights you have
related to this matter?
THE DEFENDANT: Not for the moment, your Honor.
THE COURT: Are you ready to plea?
THE DEFENDANT: Yes.
THE COURT: Any legal reason why the defendant
should not plead guilty?
MR. MO: No, your Honor.
THE COURT: Mr. Defendant, are you satisfied
with the legal representation you have received up to this
point?
THE DEFENDANT: Yes.
THE COURT: How do you plead to counts one and
two of the information? Guilty or not guilty?
THE DEFENDANT: Guilty.
THE COURT: And guilty as to each count?
THE DEFENDANT: Correct.
THE COURT: Are you making a plea of guilty
voluntarily and of your own free will?
THE DEFENDANT: Yes.
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HARRY RAPAPORT, CERTIFIED REALTIME REPORTEROFFICIAL COURT REPORTER
13THE COURT: Has anyone threatened or forced you
to plead guilty?
THE DEFENDANT: No.
THE COURT: Than the agreement state on the
record by the government, anyone made you any promises to
force you to plead guilty?
THE DEFENDANT: No.
THE COURT: Has anyone made any promises to you
as to what I would do?
THE DEFENDANT: No.
THE COURT: You will have to tell me in your own
words what you did between October 2007 to 2010 -- and
September 2010 in the Eastern District of New York, Suffolk
County? What did you do with respect to count one?
THE DEFENDANT: As part of the Falcon Store
software employee, my management asked me to take care of
the potential customers on October 12th, 2007, when they
had a planned trip to Hong Kong and Macau. My management
asked me to fly to Hong Kong and Macau to take care of
them, meaning to provide bribery in the casino in Macau.
That is the first incident.
And then later on in 2009, on March 7th, my
management, specifically Reijane Huai, in the first
incident that was -- in the first incident on October
11th, 2007, Eric Chen, the general manager of Asia
Case 1:10-cv-04572-ERK-CLP Document 36-2 Filed 11/03/11 Page 14 of 21 PageID #: 415
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13
14
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HARRY RAPAPORT, CERTIFIED REALTIME REPORTEROFFICIAL COURT REPORTER
14Pacific, gave me $35,000 of American Express travelers
check in Hong Kong, and asked me to take care of the
employees in Macau, in the casinos and other places in
Macau.
THE COURT: How about the first count? Where
did the conversation take place?
THE DEFENDANT: The conversation took place in
Hong Kong, in Callon (ph).
THE COURT: What is the jurisdiction here?
MR. SINCLAIR: The company that the defendant
mentioned, the government will prove is located in Melville,
Long Island, and the defendant flew from John F. Kennedy
Airport in Queens to Hong Kong as part of this trip.
THE COURT: The same thing on the second?
MR. SINCLAIR: The basis -- you are talking
about the extortion, your Honor?
THE COURT: Yes.
MR. SINCLAIR: The basis of the jurisdiction is
that the government would prove that elements of the
extortion took place at the company headquarters in
Melville, though elements of the extortion also took place
outside of the Eastern District of New York, Manhattan.
THE COURT: Do you want to add anything to what
the defendant said?
MR. SINCLAIR: With respect to the extortion
Case 1:10-cv-04572-ERK-CLP Document 36-2 Filed 11/03/11 Page 15 of 21 PageID #: 416
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HARRY RAPAPORT, CERTIFIED REALTIME REPORTEROFFICIAL COURT REPORTER
15count, I don't think the defendant has allocuted at all.
Did you want to have me ask generally?
THE COURT: Yes. You ask him generally.
MR. SINCLAIR: Okay.
(Questions BY Mr. Sinclair to the defendant:)
Q With respect to the extortion, at some point did you
attempt to extort money from Reijane Huai?
A Yes.
Q Did you do that by leaving a letter on Mr. Huai's
desk?
A Yes, I did.
Q And is that desk in Melville, Long Island?
A Correct.
Q And in drafting that letter, did you intend to
instill fear in Mr. Huai?
A Yes.
Q And the fear you intended to instill was what?
A Was to expose his involvement of the bribery in the
past three years.
MR. SINCLAIR: Your Honor, the government would
prove at trial that in fact the defendant and Mr. Huai had
a meeting where Mr. Huai provide $160,000 cashier's check
from JP Morgan Chase, a national bank, which would have
impact interstate commerce, in addition to the fact that
the company in which this took place is a publicly-traded
Case 1:10-cv-04572-ERK-CLP Document 36-2 Filed 11/03/11 Page 16 of 21 PageID #: 417
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HARRY RAPAPORT, CERTIFIED REALTIME REPORTEROFFICIAL COURT REPORTER
16company.
THE COURT: Based upon the information given to
me, I find the defendant acted voluntarily, fully
understands his rights to enter a plea, and accept the
basis for the plea. I therefore accept the plea of guilty
to counts one and two of the information.
See probation before you leave.
What is the bail situation?
MR. SINCLAIR: Your Honor, we have agreed to an
unsecured bond in the amount of $250,000 signed by both
the defendant and his wife, who is present in court today.
There are certain conditions set forth on the
bond to include telephonic communication with Pretrial
Services as directed.
The defendant is to -- the defendant has already
given his passport to the government, and we will provide
that passport to the Court today.
THE CLERK: Pretrial.
MR. SINCLAIR: To Pretrial Services.
There are additional conditions on the bond that
the defendant should not have any contact with the
personnel at Falcon Store or JP Morgan Chase.
I believe we handed up a completed bond already.
(End of proceedings.)
Case 1:10-cv-04572-ERK-CLP Document 36-2 Filed 11/03/11 Page 17 of 21 PageID #: 418
$
$1,000 [1] - 10:3
$100 [1] - 11:13
$160,000 [1] - 15:22
$250 [1] - 10:4
$250,000 [1] - 16:10
$35,000 [1] - 14:1
0
00135 [1] - 1:3
1
100 [2] - 1:13, 20
11 [2] - 1:3; 2:1
11722 [2] - 1:14, 21
11th [1] - 13:25
12:30 [1] - 1:7
12th [1] - 13:17
135 [1] - 2:2
16 [1] - 1:7
18 [4] - 8:5, 8; 11:24;
12:3
1951 [1] - 8:8
2
20 [1] - 11:12
2007 [3] - 13:12, 17,
25
2009 [1] - 13:22
2010 [2] - 13:12
2011 [1] - 1:7
3
3553(a [2] - 11:24;
12:3
371 [1] - 8:6
4
45 [1] - 3:16
6
631 [1] - 1:21
7
712-6105 [1] - 1:21
7th [1] - 13:22
A
accept [3] - 6:14; 16:4
accepting [1] - 3:3
acknowledge [1] - 7:18
act [1] - 10:6
Act [3] - 8:6, 16; 9:18
acted [1] - 16:3
activities [1] - 9:23
add [1] - 14:23
addiction [1] - 4:10
addition [1] - 15:24
additional [1] - 16:20
address [1] - 7:2
advance [1] - 2:8
affected [1] - 10:15
aforementioned [1] -
8:16
agreed [1] - 16:9
agreeing [1] - 8:15
agreement [16] - 2:8,
10, 17-18; 6:25; 7:2,
11; 8:9, 11-12, 14;
9:4, 21-22; 13:4
Airport [1] - 14:13
alcoholic [1] - 4:7
allocuted [1] - 15:1
AMERICA [1] - 1:3
American [1] - 14:1
amount [1] - 16:10
answer [2] - 3:9; 7:18
answers [2] - 3:2, 7
appeal [9] - 6:18, 25;
7:3, 5, 7-8, 12
APPEARANCES [1] - 1:11
applicable [1] - 11:23
Asia [1] - 13:25
assessment [1] - 11:14
assistance [1] - 5:12
Assistant [1] - 1:15
assisted [1] - 1:24
assure [1] - 3:4
attack [1] - 6:18
attained [1] - 3:21
attempt [1] - 15:7
attempted [1] - 10:12
Attorney [2] - 1:13,
15
attorney [3] - 2:19;
11:19; 12:2
attorney's [1] - 2:20
aware [1] - 10:17
B
bail [1] - 16:8
bank [1] - 15:23
based [1] - 16:2
basis [4] - 6:20;
14:15, 18; 16:5
BEFORE [1] - 1:8
behalf [1] - 6:3
benefit [1] - 9:25
between [3] - 2:9;
8:12; 13:12
beverage [1] - 4:7
beyond [3] - 5:18;
9:19; 10:11
bond [4] - 16:10, 13,
20, 23
bribe [1] - 10:3
bribery [4] - 8:7;
9:24; 13:20; 15:18
BY [1] - 15:5
C
C.S.R [1] - 1:19
Callon [1] - 14:8
cannot [1] - 6:9
capable [1] - 4:22
care [4] - 4:2; 13:16,
19; 14:2
carry [1] - 9:23
cashier's [1] - 15:22
casino [1] - 13:20
casinos [1] - 14:3
Central [3] - 1:5, 14,
21
certain [1] - 16:12
change [1] - 5:3
changed [1] - 6:21
charge [1] - 12:6
charged [1] - 10:18
charges [3] - 5:12;
7:17; 10:22
charging [1] - 8:5
Chase [2] - 15:23;
16:22
check [2] - 14:2; 15:22
Chen [1] - 13:25
chose [1] - 6:7
citizen [1] - 3:17
clear [1] - 4:12
CLERK [2] - 2:1; 16:18
client [1] - 4:17
Code [2] - 8:6, 8
collaterally [1] -
6:18
college [1] - 3:23
College [2] - 3:24; 4:1
commerce [3] - 9:23;
10:15; 15:24
commercial [2] - 8:7;
9:24
commit [1] - 8:7
communication [1] -
16:13
company [7] - 10:1, 4;
14:10, 20; 15:25; 16:1
compelled [1] - 6:9
1competency [1] - 5:1
competent [1] - 5:17
completed [1] - 16:23
computer [1] - 1:24
computer-assisted [1]
- 1:24
concerning [1] - 8:9
conditions [2] -
16:12, 20
conduct [1] - 10:2
conferring [1] - 9:25
consent [3] - 10:1, 13
consider [1] - 11:23
conspiracy [6] - 8:5,
17; 9:17; 10:5, 7
constitution [1] -
5:10
Constitution [1] - 6:8
constitutional [1] -
6:15
contact [1] - 16:21
conversation [2] -
14:6
cooperation [1] - 9:5
correct [4] - 2:21;
7:10; 12:22; 15:13
counsel [2] - 5:12, 25
count [12] - 8:4, 7,
17; 10:8; 11:11, 14-15;
12:21; 13:14; 14:5;
15:1
counts [5] - 8:16;
9:17; 11:4; 12:18; 16:6
County [1] - 13:14
course [1] - 5:23
COURT [66] - 1:1; 2:11,
14, 16, 22; 3:13, 15,
17, 20, 23, 25; 4:2, 5,
9, 12, 14, 16, 19, 22,
25; 5:3, 6, 9, 15, 23;
6:6, 14, 24; 7:4, 12,
23; 8:2, 9, 18; 9:4, 7,
10, 15; 10:8, 16, 21,
25; 11:3, 7, 10, 13,
21; 12:2, 5, 9, 11, 14,
18, 21, 23; 13:1, 4, 8,
11; 14:5, 9, 14, 17,
23; 15:3; 16:2
court [3] - 5:24; 9:14;
16:11
Court [8] - 1:19; 2:7;
6:10; 8:14; 11:4, 22;
16:17
Court's [1] - 2:9
Courthouse [1] - 1:4
courtroom [1] - 9:8
CR [2] - 1:3; 2:1
Case 1:10-cv-04572-ERK-CLP Document 36-2 Filed 11/03/11 Page 18 of 21 PageID #: 419
crimes [1] - 10:17
cross [1] - 6:1
cross-examine [1] -
6:1
customers [1] - 13:17
D
decided [1] - 6:10
Defendant [2] - 1:6,
16
defendant [26] - 2:11,
13; 5:6; 7:1; 8:3, 13,
15; 9:16, 21; 10:6, 11,
16; 11:7; 12:11, 14;
14:10, 12, 24; 15:1, 5,
21; 16:3, 11, 15, 21
DEFENDANT [43] - 2:15,
21; 3:12, 14, 16, 19,
22, 24; 4:1, 4, 8, 11,
13, 15; 5:8, 14, 22;
6:5, 13, 23; 7:22; 8:1,
4; 10:20, 24; 11:2, 9,
11, 17, 20; 12:1, 4, 8,
10, 17, 20, 22, 25;
13:3, 7, 10, 15; 14:7
defendant's [1] - 5:1
desk [2] - 15:10, 12
directed [1] - 16:14
discussed [5] - 4:17;
6:16; 7:25; 10:21;
11:18
DISTRICT [2] - 1:1
District [4] - 1:20;
11:22; 13:13; 14:22
documents [1] - 2:7
doubt [4] - 4:25; 5:18;
9:19; 10:11
drafting [1] - 15:14
drugs [1] - 4:6
drunk [1] - 4:6
duty [1] - 5:20
E
Eastern [2] - 13:13;
14:22
EASTERN [1] - 1:1
elements [5] - 9:16,
18; 10:17; 14:19, 21
employee [2] - 9:25;
13:16
employee's [2] - 10:1
employees [1] - 14:3
employer [1] - 10:3
End [1] - 16:25
enter [2] - 7:6; 16:4
entered [2] - 6:19; 9:6
entitled [1] - 5:11
Eric [1] - 13:25
ESQ [2] - 1:14, 16
evidence [3] - 5:17;
6:2
exact [3] - 2:23
examine [1] - 6:1
exceeds [1] - 10:3
explain [1] - 9:15
explained [1] - 12:2
expose [1] - 15:18
Express [1] - 14:1
extort [1] - 15:7
extortion [9] - 8:8,
17; 10:9, 14; 14:16,
20-21, 25; 15:6
F
fact [3] - 7:5; 15:21,
24
facts [2] - 11:24; 12:3
failed [1] - 5:19
Falcon [2] - 13:15;
16:22
false [1] - 3:9
fear [3] - 10:14;
15:15, 17
Federal [2] - 1:13, 20
filled [1] - 2:25
first [6] - 8:2; 9:17;
13:21, 23-24; 14:5
five [1] - 11:11
flew [1] - 14:12
fly [1] - 13:19
following [2] - 9:2,
13
force [1] - 13:6
forced [1] - 13:1
forth [2] - 8:12; 16:12
four [1] - 4:5
free [1] - 12:24
full [1] - 3:13
fully [1] - 16:3
furtherance [1] - 10:7
G
gained [1] - 10:13
gee [1] - 2:1
general [1] - 13:25
generally [2] - 15:2
given [2] - 16:2, 16
government [16] -
5:16, 19, 24; 6:1, 24;
8:2; 9:15, 20; 10:9;
13:5; 14:11, 19; 15:20;
16:16
Government [1] - 1:12
guideline [1] - 11:23
guidelines [2] -
11:19, 22
guilt [5] - 5:9, 17;
6:19; 7:17, 19
guilty [25] - 4:20;
5:7, 20; 6:14, 19-20;
7:5, 15, 17; 8:3, 15;
10:18, 23; 11:1; 12:12,
19-21, 23; 13:2, 6;
16:5
H
hand [1] - 2:12
handed [1] - 16:23
harmed [1] - 10:4
HARRY [1] - 1:19
headquarters [1] -
14:20
highest [1] - 3:20
hold [1] - 6:11
Hong [5] - 13:18; 14:2,
8, 13
Honor [12] - 2:5; 4:18,
21, 24; 5:2; 7:3; 8:17;
12:8, 13; 14:16; 15:20;
16:9
HONORABLE [1] - 1:9
hospitalized [1] - 4:9
hours [1] - 4:5
Huai [5] - 13:23; 15:7,
15, 21
Huai's [1] - 15:9
Hugh [1] - 2:4
HUGH [1] - 1:16
I
impact [1] - 15:24
impose [1] - 11:4
imprisonment [1] -
11:6
incident [3] - 13:21,
24
include [1] - 16:13
including [1] - 2:8
incriminate [2] - 6:9;
7:20
indictment [1] - 2:10
influence [1] - 10:2
information [6] - 2:8;
8:4; 10:22; 12:19;
16:2, 6
innocence [1] - 5:19
innocent [1] - 5:16
2instill [2] - 15:15, 17
instruct [1] - 6:10
intend [1] - 15:14
intended [1] - 15:17
intent [1] - 10:2
interstate [3] - 9:23;
10:14; 15:24
involvement [1] -
15:18
involves [1] - 9:25
Island [2] - 14:12;
15:12
Islip [3] - 1:5, 14, 21
J
Jie [2] - 2:15; 3:14
JIE [1] - 1:5
John [1] - 14:12
JP [2] - 15:23; 16:22
Judge [1] - 5:5
judgment [2] - 6:19
jurisdiction [2] -
14:9, 18
jury [4] - 5:11, 19;
6:11; 9:19
K
Kennedy [1] - 14:12
kind [1] - 6:17
knows [1] - 11:7
Kong [5] - 13:18; 14:2,
8, 13
L
L-I-N [1] - 2:15
last [2] - 2:15, 19
law [2] - 9:24; 10:5
laws [1] - 5:10
lawyer [2] - 4:16;
10:21
least [1] - 10:6
leave [1] - 16:7
leaving [1] - 15:9
ledge [1] - 3:22
legal [2] - 12:11, 15
LEONARD [1] - 1:9
letter [2] - 15:9, 14
limited [1] - 7:14
LIN [1] - 1:5
Lin [1] - 3:14
lip [1] - 2:1
listed [2] - 11:24;
12:3
located [1] - 14:11
looking [1] - 2:16
Case 1:10-cv-04572-ERK-CLP Document 36-2 Filed 11/03/11 Page 19 of 21 PageID #: 420
LORETTA [1] - 1:12
LYNCH [1] - 1:12
M
Macau [5] - 13:18-20;
14:3
management [3] -
13:16, 18, 23
manager [1] - 13:25
mandatory [1] - 11:22
Manhattan [1] - 14:22
March [2] - 1:7; 13:22
matter [2] - 4:17; 12:7
maximum [3] - 11:3, 5,
11
meaning [1] - 13:20
mechanical [1] - 1:23
medicine [1] - 4:6
meeting [1] - 15:22
Melville [3] - 14:11,
21; 15:12
mention [1] - 9:9
mentioned [1] - 14:11
mind [1] - 4:12
MO [10] - 1:16; 2:4;
4:18, 21, 24; 5:2, 5;
9:5, 8; 12:13
Mo [1] - 2:4
moment [1] - 12:8
money [2] - 10:12; 15:7
Morgan [2] - 15:23;
16:22
morning [1] - 2:5
MR [26] - 2:3-5; 4:18,
21, 24; 5:2, 5; 7:2,
10; 8:11; 9:5, 8, 20;
10:10; 11:5, 18; 12:13;
14:10, 15, 18, 25;
15:4, 20; 16:9, 19
must [1] - 3:4
N
N.Y [1] - 1:5
name [3] - 2:14; 3:13
narcotic [1] - 4:6
narcotics [1] - 4:10
national [1] - 15:23
nature [1] - 4:23
never [1] - 6:20
NEW [1] - 1:1
New [5] - 1:14, 21;
9:24; 13:13; 14:22
nothing [1] - 7:10
number [1] - 3:3
O
object [1] - 6:2
obligated [1] - 9:20
obtain [1] - 10:12
October [3] - 13:12,
17, 24
OF [3] - 1:1, 3, 6
offer [1] - 6:2
offered [1] - 6:2
old [1] - 3:15
one [5] - 10:6; 11:11;
12:18; 13:14; 16:6
open [1] - 9:14
order [2] - 2:24; 7:16
outside [1] - 14:22
overcome [1] - 5:16
overt [1] - 10:6
own [2] - 12:24; 13:11
P
p.m [1] - 1:7
Pacific [1] - 14:1
page [1] - 2:19
part [2] - 13:15; 14:13
parties [2] - 2:9; 8:12
passport [2] - 16:16
past [2] - 4:5; 15:19
Patrick [1] - 2:3
PATRICK [1] - 1:14
penalties [1] - 3:8
perjury [1] - 3:8
permission [1] - 5:4
person [1] - 10:12
personnel [1] - 16:22
ph) [1] - 14:8
physician [1] - 4:3
pills [1] - 4:6
place [7] - 9:3, 14;
14:6, 20-21; 15:25
places [1] - 14:3
planned [1] - 13:18
Plaza [2] - 1:13, 20
plea [17] - 2:6, 9, 16,
18; 3:3; 6:15, 20; 7:6,
17; 8:10; 9:4; 12:9,
23; 16:4
PLEA [1] - 1:6
plead [11] - 5:1, 6, 9;
6:14; 7:15; 8:15;
10:18; 12:12, 18; 13:2,
6
pleading [4] - 4:20;
8:3; 10:22; 11:1
point [2] - 12:16; 15:6
potential [1] - 13:17
presence [1] - 5:25
present [1] - 16:11
presently [1] - 4:2
presumed [1] - 5:15
presumption [1] - 5:17
Pretrial [2] - 16:13,
19
pretrial [1] - 16:18
probation [1] - 16:7
proceeding [1] - 4:23
Proceedings [1] - 1:23
proceedings [1] -
16:25
produced [1] - 1:24
promises [2] - 13:5, 8
prove [11] - 5:17;
9:16, 18, 21; 10:5, 9,
11; 14:11, 19; 15:21
provide [3] - 13:20;
15:22; 16:16
provided [1] - 9:22
psychiatrist [1] - 4:3
public [1] - 5:11
publicly [1] - 15:25
publicly-traded [1] -
15:25
pursuant [1] - 10:5
put [1] - 5:3
Q
Queens [3] - 3:24; 4:1;
14:13
questionnaire [1] -
2:25
Questions [1] - 15:5
questions [8] - 2:23;
3:1, 4-5, 8; 7:16, 18;
12:5
R
raise [1] - 2:11
range [1] - 11:23
RAPAPORT [1] - 1:19
ready [1] - 12:9
reason [1] - 12:11
reasonable [3] - 5:18;
9:19; 10:11
received [1] - 12:15
record [1] - 13:5
recorded [1] - 1:23
Reijane [2] - 13:23;
15:7
related [1] - 12:7
release [1] - 11:14
Reporter [1] - 1:19
3representation [1] -
12:15
required [2] - 6:8;
11:23
respect [6] - 8:13;
9:17; 10:8; 13:14;
14:25; 15:6
result [1] - 10:14
reword [1] - 3:6
rights [9] - 4:19;
6:15, 25; 7:3, 24;
12:6; 16:4
S
satisfied [1] - 12:14
satisfy [1] - 7:16
schooling [1] - 3:20
sealed [1] - 9:8
second [2] - 8:7; 14:14
see [2] - 9:4; 16:7
seek [1] - 7:17
sentence [5] - 7:5;
8:10, 13, 15; 11:3
sentencing [2] -
11:18, 21
September [1] - 13:13
Services [2] - 16:14,
19
set [3] - 8:12, 14;
16:12
sidebar [2] - 8:18; 9:3
signature [2] - 2:19
signed [1] - 16:10
SINCLAIR [18] - 1:14;
2:3, 5; 7:2, 10; 8:11;
9:20; 10:10; 11:5, 18;
14:10, 15, 18, 25;
15:4, 20; 16:9, 19
Sinclair [2] - 2:3;
15:5
situation [1] - 16:8
software [1] - 13:16
special [1] - 11:13
specifically [1] -
13:23
speedy [1] - 5:11
standard [1] - 2:9
State [1] - 9:24
state [1] - 13:4
statement [1] - 3:9
STATES [2] - 1:1, 3
States [8] - 1:13, 20;
2:1; 3:18; 5:10; 6:9;
8:5, 8
stays [1] - 7:7
stenography [1] - 1:23
Case 1:10-cv-04572-ERK-CLP Document 36-2 Filed 11/03/11 Page 20 of 21 PageID #: 421
still [1] - 7:4
Store [2] - 13:15;
16:22
subject [1] - 3:8
submitted [1] - 2:7
Suffolk [1] - 13:13
supervised [1] - 11:14
sworn [2] - 2:13; 3:7
T
telephonic [1] - 16:13
term [1] - 11:5
testify [4] - 5:25;
6:7, 10
THE [110] - 2:1, 11,
14-16, 21-22; 3:12-17,
19-20, 22-25; 4:1, 4-5,
8-9, 11-16, 19, 22, 25;
5:3, 6, 8-9, 14-15,
22-23; 6:5, 13-14,
23-24; 7:4, 12, 22-23;
8:1, 4, 9, 18; 9:4, 7,
10, 15; 10:8, 16,
20-21, 24-25; 11:2, 7,
9-11, 13, 17, 20-21;
12:1, 4-5, 8-11, 14,
17-18, 20-23, 25; 13:1,
3-4, 7-8, 10-11, 15;
14:5, 7, 9, 14, 17, 23;
15:3; 16:2, 18
therefore [1] - 16:5
threatened [1] - 13:1
three [2] - 11:15;
15:19
today [2] - 16:11, 17
took [6] - 9:2; 10:6;
14:7, 20-21; 15:25
traded [1] - 15:25
TRANSCRIPT [1] - 1:6
transcript [1] - 1:24
transcription [1] -
1:24
Travel [3] - 8:6, 16;
9:18
travel [1] - 9:22
travelers [1] - 14:1
treated [1] - 4:10
trial [8] - 5:11, 15,
23; 6:6, 16-17; 7:24;
15:21
trip [2] - 13:18; 14:13
truthfully [1] - 3:10
twenty [1] - 4:5
twenty-four [1] - 4:5
two [6] - 8:4; 9:17;
10:8; 11:12; 12:19;
16:6
4two-count [1] - 8:4
U
U.S [2] - 1:4, 15
U.S.D.J [1] - 1:9
under [4] - 4:2; 5:9;
6:8; 11:4
UNITED [2] - 1:1, 3
United [8] - 1:13, 20;
2:1; 3:17; 5:10; 6:8;
8:5, 8
unsecured [1] - 16:10
up [6] - 6:15; 7:19,
23; 9:10; 12:15; 16:23
USC [2] - 11:24; 12:3
V
valid [1] - 3:4
value [1] - 10:3
violate [1] - 8:6
violation [3] - 8:5,
8; 9:23
virtue [1] - 8:14
voluntarily [2] -
12:24; 16:3
W
waiver [1] - 2:10
waiving [1] - 4:20
WEXLER [1] - 1:9
wife [1] - 16:11
willing [1] - 7:23
witnesses [2] - 5:24;
6:1
words [1] - 13:12
written [3] - 2:8, 10;
8:11
wrongful [1] - 10:13
Y
years [4] - 11:11, 15;
15:19
YORK [1] - 1:1
York [5] - 1:14, 21;
9:24; 13:13; 14:22
yourself [2] - 6:9;
7:20
Case 1:10-cv-04572-ERK-CLP Document 36-2 Filed 11/03/11 Page 21 of 21 PageID #: 422
EXHIBIT 3
Case 1:10-cv-04572-ERK-CLP Document 36-3 Filed 11/03/11 Page 1 of 6 PageID #: 423
Case 2:11-cr-00484-LDW Document 2 Filed 07/05/11 Page 1 of 5 PageID #: 5Case 1:10-cv-04572-ERK-CLP Document 36-3 Filed 11/03/11 Page 2 of 6 PageID #: 424
Case 2:11-cr-00484-LDW Document 2 Filed 07/05/11 Page 2 of 5 PageID #: 6Case 1:10-cv-04572-ERK-CLP Document 36-3 Filed 11/03/11 Page 3 of 6 PageID #: 425
Case 2:11-cr-00484-LDW Document 2 Filed 07/05/11 Page 3 of 5 PageID #: 7Case 1:10-cv-04572-ERK-CLP Document 36-3 Filed 11/03/11 Page 4 of 6 PageID #: 426
Case 2:11-cr-00484-LDW Document 2 Filed 07/05/11 Page 4 of 5 PageID #: 8Case 1:10-cv-04572-ERK-CLP Document 36-3 Filed 11/03/11 Page 5 of 6 PageID #: 427
Case 2:11-cr-00484-LDW Document 2 Filed 07/05/11 Page 5 of 5 PageID #: 9Case 1:10-cv-04572-ERK-CLP Document 36-3 Filed 11/03/11 Page 6 of 6 PageID #: 428
EXHIBIT 4
Case 1:10-cv-04572-ERK-CLP Document 36-4 Filed 11/03/11 Page 1 of 17 PageID #: 429
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OWEN WICKER, RPROFFICIAL COURT REPORTER
1UNITED STATES DISTRICT COURTEASTERN DISTRICT OF NEW YORK
----------------------------X
UNITED STATES OF AMERICA, CR 11-00484-01
-against-U.S. CourthouseCentral Islip, NY
TED ZAHNER,July 5, 2011
Defendant. 11:00 a.m.
----------------------------X
TRANSCRIPT OF PLEADINGBEFORE THE HONORABLE LEONARD D. WEXLER
UNITED STATES DISTRICT JUDGE
APPEARANCES:
For the Government: LORETTA E. LYNCHUnited States Attorney100 Federal Plaza.Central Islip, NY 11722By: PATRICK SINCLAIR, AUSA
Assistant U.S. Attorney
For the Defendant: JONATHAN MARKS, ESQ.
Court Reporter: Owen M. Wicker, R.P.R.100 Federal PlazaCentral Islip, NY 11722
(631) 712-6102
Proceedings recorded by mechanical stenography; transcriptproduced by computer transcription.
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OWEN WICKER, RPROFFICIAL COURT REPORTER
2(Case called.)
MR. SINCLAIR: For the United States, Patrick
Sinclair. Good afternoon, your Honor.
MR. MARKS: Jonathan Marks for Mr. Zahner.
Good afternoon, your Honor. I greatly
appreciate you accommodating me and to rearrange my
schedule so I could make arrangements for a funeral and be
here as well.
THE COURT: What is he pleading to?
MR. SINCLAIR: A one count --
THE COURT: What is he pleading to?
MR. MARKS: The Traffic Act.
MR. SINCLAIR: Violating for commercial bribery
to violate the Travel Act, Judge.
THE COURT: Swear in the defendant.
(Defendant sworn).
THE COURT: Before I take your plea, you filled
out my standard plea agreement; is that correct?
THE DEFENDANT: Yes.
THE COURT: And you signed on your last page and
your attorney signed?
THE DEFENDANT: Yes.
THE COURT: So you know what my questions are
and you know what the answers are?
THE DEFENDANT: Yes.
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OWEN WICKER, RPROFFICIAL COURT REPORTER
3THE COURT: And I will stay in the same order so
you know what is going on.
THE DEFENDANT: Yes.
THE COURT: Before accepting your plea there are
a number of questions I must ask to assure that it is a
valid plea. If you do not understand any of my questions,
please say so and I will reword the question.
Do you understand that having been sworn your
answers to my questions will be subject to the penalties
of perjury or of making a false statement if you do not
answer them truthfully?
THE DEFENDANT: Yes.
THE COURT: What is your full name?
THE DEFENDANT: Ted Alan Zahner.
THE COURT: What is your age?
THE DEFENDANT: Age 41.
THE COURT: Are you a citizen of the United
States?
THE DEFENDANT: Yes.
THE COURT: What is the highest schooling or
education you have had?
THE DEFENDANT: Franklin University, Columbus
Ohio.
THE COURT: Are you presently or recently under
the care of a physician or psychiatrist?
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OWEN WICKER, RPROFFICIAL COURT REPORTER
4THE DEFENDANT: No.
THE COURT: In the past 24 hours have you taken
any narcotics, drugs, medicine or pills or drunk any
alcoholic beverages?
THE DEFENDANT: No.
THE COURT: Have you ever been hospitalized or
treated for narcotics addiction?
THE DEFENDANT: No.
THE COURT: Is your mind clear?
THE DEFENDANT: Yes.
THE COURT: Do you understand what is going on?
THE DEFENDANT: Yes.
THE COURT: To your lawyer, have you discussed
this matter with your client?
MR. MARKS: Yes, your Honor.
THE COURT: Does he understand the rights he
would be waiving by pleading guilty?
MR. MARKS: He does.
THE COURT: Before going any further, was there
an arraignment in this case, or is he pleading --
MR. SINCLAIR: This is the defendant's first
appearance. There has been no prior arrangement.
MR. MARKS: He's pleading to an information, not
an indictment, your Honor.
THE COURT: An information.
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OWEN WICKER, RPROFFICIAL COURT REPORTER
5MR. MARKS: Yes.
THE COURT: First, it may sound silly, but he
has to plead not guilty to the information.
Now, you were served with an information. How
do you plead to the information?
THE DEFENDANT: Not guilty, your Honor.
THE COURT: Now we'll continue with the plea of
guilty to the information after the arraignment. It's a
waiver of indictment.
Do you know what a waiver of indictment means?
THE DEFENDANT: Yes.
THE COURT: That you are coming into court and
you are pleading guilty to the misdemeanor without this
going to a grand jury which is a matter of right.
MR. MARKS: He's pleading guilty to the
information.
THE COURT: Information, I'm sorry.
MR. SINCLAIR: Which is also a felony.
THE COURT: I'm sorry.
So you are waiving this matter to a grand jury
for an indictment and pleading to the information which is
a felony.
Do you understand that.
THE DEFENDANT: Yes.
THE COURT: I'm just signing the waiver. That's
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OWEN WICKER, RPROFFICIAL COURT REPORTER
6the reason we go through that formality of not pleading
guilty and then we plead guilty after he waives. So he
just waived.
So in the past twenty-four hours have you taken
any narcotic drugs, medicine or pills or drunk any
alcoholic beverages?
THE DEFENDANT: No.
THE COURT: Have you ever been hospitalized or
treated for narcotic addiction?
THE DEFENDANT: No.
THE COURT: Is your mind clear?
THE DEFENDANT: Yes.
THE COURT: Do you know what is going on?
THE DEFENDANT: Yes.
THE COURT: Back to your lawyer. Have you
discussed this matter with your client?
MR. MARKS: I have.
THE COURT: Does he understand the rights he'd
be waiving by pleading guilty?
MR. MARKS: He does.
THE COURT: Is he capable of understanding the
nature of these proceedings?
MR. MARKS: Yes.
THE COURT: Do you have any doubt as to the
defendant's competency to plead at this time?
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OWEN WICKER, RPROFFICIAL COURT REPORTER
7MR. MARKS: No, your Honor.
THE COURT: Back to you, Mr. Defendant. You
have a right to plead not guilty.
Do you understand that.
THE DEFENDANT: Yes.
THE COURT: And if you plead not guilty under
the constitution and laws of the United States you are
entitled to a speedy and public trial by jury with the
assistance of counsel on the charges.
Do you understand that?
THE DEFENDANT: Yes.
THE COURT: At the trial you would be presumed
to be innocent and the government would have to overcome
that presumption and prove you guilty by competent
evidence and beyond a reasonable doubt and you would not
have to prove you are innocent, and if the government
failed, the jury would have the duty to find you not
guilty.
Do you understand that?
THE DEFENDANT: Yes.
THE COURT: During the course of the trial the
witnesses for the government have to come to court and
testify in your presence and your counsel has the right to
cross-examine the witnesses for the government, to object
to evidence offered by the government and to offer
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OWEN WICKER, RPROFFICIAL COURT REPORTER
8evidence on your behalf.
Do you understand that?
THE DEFENDANT: Yes.
THE COURT: At the trial while you would have
the right to testify if you chose to do so, you would not
be required to testify. Under the constitution of the
United States you cannot be compelled to incriminate
yourself.
If you decided not to testify, the Court would
instruct the jury they cannot hold that against you.
Do you understand that?
THE DEFENDANT: Yes.
THE COURT: If you plead guilty and if I accept
the plea you will be giving up your constitutional rights
to the trial and the other rights I've just discussed.
There will be no further trial of any kind, no right to
appeal or collaterally attack at any time the question
whether you are guilty or not. A judgment of guilty will
be entered on the basis of your guilty plea which judgment
can never be challenged.
Do you understand that?
THE DEFENDANT: Yes.
THE COURT: I'll ask the government what
agreement is there concerning appeal?
MR. SINCLAIR: There is no agreement with
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OWEN WICKER, RPROFFICIAL COURT REPORTER
9respect to an appeal waiver, your Honor.
THE COURT: So that means you can appeal the
sentence but you cannot appeal your plea of guilty.
Do you understand that?
THE DEFENDANT: Yes.
THE COURT: And if you plead guilty I'll have to
ask you questions about what you did in order to satisfy
myself that you are guilty of the charge you which to seek
to plead guilty and you will have to answer my questions
and acknowledge your guilt. Thus, you will be giving up
your right not to incriminate yourself.
Do you understand that?
THE DEFENDANT: Yes.
THE COURT: Are you willing to give up your
rights to a trial and the other rights I've discussed?
THE DEFENDANT: Yes.
THE COURT: I'll ask the government what
agreement is there concerning plea and sentence?
MR. SINCLAIR: There is no agreement with
respect to the sentence, your Honor.
We do have an estimate with respect to the
guidelines if the Court would like to hear.
THE COURT: What is the estimate.
MR. SINCLAIR: The estimate is that there's a
guideline range of between 57 and 60 months and there is a
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OWEN WICKER, RPROFFICIAL COURT REPORTER
10statutory cap of five years or 60 months with respect to
that plea of 18 U.S. Code 371, the conspiracy statute.
MR. SINCLAIR: The government will now --
THE COURT: The government will now explain the
elements they would have to prove if this case went to
trial beyond a reasonable doubt.
MR. SINCLAIR: The government would have to
prove that the defendant entered into an agreement with
others to travel in interstate commerce and as part of
that travel to carry on activities in violation of the New
York State Commercial Bribery Statute, which means that
the defendant would have to confer a benefit on an
employee or accept the benefits which was being conferred
on him with the intent to influence that employee's
conduct, that the value of those bribes exceeded $1,000,
and that the employer of the employee who accepted the
bribe in this case, the defendant, was harmed by more than
$250.
The defendant -- the government would also have
to prove that in furtherance of the conspiracy the
defendant committed at least one overt act in furtherance
of this conspiracy and in this regard the government would
prove that on or about March 9, 2009, the defendant
arranged with employees of FalconStor Software for his
brother to be granted 25,000 stock options in FalconStor
Case 1:10-cv-04572-ERK-CLP Document 36-4 Filed 11/03/11 Page 11 of 17 PageID #: 439
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OWEN WICKER, RPROFFICIAL COURT REPORTER
11options stock.
There are also forfeiture allegations and the
government would prove by a preponderance of the evidence
that the defendant is liable for forfeiture in the amount
of $184,792.
THE COURT: Are you now aware of the elements of
the crime for which you are charged with?
THE DEFENDANT: Yes.
THE COURT: Have you discussed through your
lawyer the charge in the information which you are about
to plead guilty to?
THE DEFENDANT: Yes.
THE COURT: Do you understand what you are
pleading guilty to?
THE DEFENDANT: Yes.
THE COURT: What is the maximum sentence if this
case went to trial that I could give you. What's the
maximum jail time?
THE DEFENDANT: Five years.
THE COURT: And the fine?
MR. MARKS: We believe the fine is $250,000 or
twice the pecuniary loss or gain, whichever is the
greater.
THE COURT: And you also realize there is a $100
special assessment for the fine?
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OWEN WICKER, RPROFFICIAL COURT REPORTER
12THE DEFENDANT: Yes.
THE COURT: And the Court could order
restitution if it so desired?
THE DEFENDANT: Yes.
THE COURT: And there's a supervised release
period of three years maximum.
THE DEFENDANT: Yes.
THE COURT: Have you discussed the sentencing
guidelines with your attorney?
THE DEFENDANT: Yes.
THE COURT: And do you understand the sentencing
guidelines are not mandatory but that in sentencing the
district court is required to consider the applicable
guideline range along with the factors listed in 18 U.S.C.
3553(a)?
THE DEFENDANT: Yes.
THE COURT: Has your attorney explained the
factors listed in 18 U.S.C. 3553(a)?
THE DEFENDANT: Yes.
THE COURT: Do you have any questions you'd like
to ask me about your charge, the rights or anything
relating to this matter.
THE DEFENDANT: No.
THE COURT: Are you ready to plead?
THE DEFENDANT: Yes.
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OWEN WICKER, RPROFFICIAL COURT REPORTER
13THE COURT: I'll ask your lawyer, do you know of
any legal reason why defendant should not plead guilty?
MR. MARKS: I do not, your Honor.
THE COURT: Back to you, Mr. Defendant. Are you
satisfied with the legal representation you have received
up to this point?
THE DEFENDANT: Yes.
THE COURT: You think your lawyer has done a
fair job?
THE DEFENDANT: Yes.
THE COURT: How do you plead to the one count
information, guilty or not guilty?
THE DEFENDANT: Guilty.
THE COURT: Are you making the plea of guilty
voluntarily and of your own free will?
THE DEFENDANT: Yes.
THE COURT: Has anyone threatened or forced you
to plead guilty?
THE DEFENDANT: No.
THE COURT: Other than the agreement with the
government as stated on the record has anyone made you any
promises to cause you to plead guilty?
THE DEFENDANT: No.
THE COURT: Or that anyone made you any promises
as to what your sentence will be?
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OWEN WICKER, RPROFFICIAL COURT REPORTER
14THE DEFENDANT: No.
THE COURT: You will have to tell me what you
did with respect to the information between October 2007
and September 2010. What did you do that is causing to
you plead guilty?
MR. MARKS: Your Honor, before MR. Zahner
answers that question I think I ought to inform the Court
the fact that I have gone over the information with him
very carefully and he waives his public reading.
THE COURT: Okay. Thank you.
MR. MARKS: Thank you.
THE DEFENDANT: Okay. During the period from
October 2007 through September 2010, I was employed by
JPMorgan Chase, or Chase in Columbus, Ohio.
MR. MARKS: Slow down.
THE DEFENDANT: I was responsible for, among
other things, recommending the purchase of storage
technology software by Chase.
In that capacity I recommended that Chase
purchase software from FalconStor Software, Incorporated,
a company headquartered in Melville, Long Island.
Following my recommendations Chase entered into
various contracts with FalconStor.
During that period, I agreed with employees of
FalconStor and others to travel between New York and Ohio
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OWEN WICKER, RPROFFICIAL COURT REPORTER
15and other places in interstate and foreign commerce to
further a scheme by which FalconStor would give me stock,
stock options, and other things of value for the purpose
of influencing my purchasing recommendations to Chase.
I knew what I was doing was wrong.
In March 2009, I asked my brother to accept
25,000 shares of FalconStor stock options in his name.
The forfeiture: I agreed to forfeit $184,792 to
the United States.
THE COURT: How much?
THE DEFENDANT: $184,792.
THE COURT: Are you satisfied with the
allocution?
MR. SINCLAIR: I believe there is a factual
basis, yes, your Honor.
THE COURT: Based upon the information given to
me I find defendant is acting voluntarily, fully
understands his rights and the consequences of a plea and
there is a factual basis for the plea. I, therefore,
accept the plea of guilty to the one count information.
See probation before you leave.
MR. SINCLAIR: Your Honor, the only request we
make we ask that the Court execute a personal recognizance
bond which he completed and I think he handed up. I'm not
sure.
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OWEN WICKER, RPROFFICIAL COURT REPORTER
16THE COURT: Yes, it is up here.
Defendant consent to this?
MR. MARKS: We do, your Honor.
THE COURT: Granted.
MR. MARKS: Thank you.
THE COURT: Now, what will happen, after you see
probation, probation will make a report.
They, in turn, will turn it over to me and to
your lawyer. Your lawyer will go over it. He has the
right to make objections to it and we'll set it down for
sentencing when all of that is completed.
Which airport did you come into?
THE DEFENDANT: La Guardia.
THE COURT: Try MacArthur, it is closer. It's
ten minutes away.
MR. MARKS: We tried, but no success.
MR. SINCLAIR: I also gave him that information.
MR. MARKS: There was a flight that didn't come
in the right time. The next time we'll try to do it.
THE COURT: Thank you.
MR. MARKS: Thank you, Judge.
(Proceedings concluded.)
Case 1:10-cv-04572-ERK-CLP Document 36-4 Filed 11/03/11 Page 17 of 17 PageID #: 445