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FalconStor buys $5.8M of 'relief" with bribery charge settlement

FalconStor will pay $5.8 million to settle criminal and civil charges that it bribed JP Morgan Chase to buy its software, and CEO Jim McNiel said the vendor can now focus completely on re-architecting its backup software and services.

“I’m relieved,” McNiel said after the payment was disclosed Wednesday by FalconStor and the U.S. Securities and Exchange Commission (SEC). “We spent over 18 months of wrangling with authorities to prove the company wasn’t a systemic criminal organization. It was a very small number of people with a single customer. We put additional controls in place so we can catch things like this. This gives us the freedom to walk off and do our business.”

More details about the crime were divulged with the settlement. The SEC charged that former FalconStor CEO ReiJane Huai and two sales employees paid more than $300,000 in bribes in 2008-09 to JP Morgan employees in exchange for JP Morgan’s purchasing $12.2 million of FalconStor software and services. The JP Morgan sales made up 7% of FalconStor’s revenue during that period.

The bribes included FalconStor shares, stock options, gambling vouchers, gift cards, golf memberships and golf-related benefits. FalconStor recorded the expenses as “compensation to an advisor” and employment bonuses.

The FalconStor sales people have been fired. McNeil, who replaced Huai in late 2010 and was not involved with the bribery incident, said JP Morgan remains a FalconStor customer.

The low point of the scandal came last September when Huai committed suicide at his Glen Head, N.Y. home.

“It’s hard to estimate how much this hurt us, but I would say it’s had an impact,” McNiel said. “I have had conversations with customers who say our competitors have told them we’re probably not going to stay in business. They’ve said, ‘What if the company gets fined $50 million? That fact that it’s a full economic impact of $5.8 million puts a fence around this. It clears up a big dark question mark.

“But all of that pales in comparison to ReiJane taking his life. I’ve known him 23 years. People here had the utmost respect for him. He lost his way, and that’s the tragedy. It’s easy for people to forget the human tragedy.”

As CEO, McNiel has worked on revamping FalconStor’s product line as well as accelerating its strategy of going from an OEM-driven company to a direct-sales vendor. A big part of FalconStor’s plan revolves around its Bluestone initiative to deliver services-oriented data protection and management. McNiel said Bluestone is expected to launch in the first half of 2013.

“We are anxious to get all this behind us and rebuild the company,” he said. “This is not the only thing FalconStor needs to be concerned with. Our sales have gone flat. Our focus now is on creating new disruptive products.”

On the shift from its OEM model, McNiel said: “We have been like a component in a car. We’ve been an alternator or a fuel pump. Now we have to build the whole car.”

FalconStor took steps in its rebuilding with the release of new versions of its data deduplication, Network Storage Server (NSS) and Continuous Data Protection (CDP) products last August. Those upgrades are seen as precursors to Bluestone.

“The challenge is deliver all of that in a simplified user experience,” McNiel said.

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