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FalconStor to pay $5.8M to end fed probe

Melville-based FalconStor Software, a data storage company, reported

Melville-based FalconStor Software, a data storage company, reported lower second-quarter profits Tuesday. Credit: Steve Pfost, 2011

FalconStor Software Inc., a Melville-based data-storage company, has agreed to pay $5.8 million to resolve a federal investigation into a bribery scheme involving the company's former chief executive.

The U.S. attorney's office in Brooklyn has agreed not to pursue charges that the company paid more than $300,000 in bribes to JPMorgan Chase & Co. executives. As part of the deal, FalconStor admitted to the allegations and agreed to pay criminal penalties and a civil fine to the U.S. Securities and Exchange Commission.

"The fact that this is resolved is a real relief for us," chief executive James P. McNiel said Wednesday.

The scheme involved FalconStor's former chief executive, ReiJane Huai, and two former salesmen who allegedly paid bribes to executives at JPMorgan Chase & Co. in exchange for $12 million in contracts.

Huai committed suicide in September, the day before he was scheduled to plead guilty. A former FalconStor salesman and an ex-JPMorgan official have also pleaded guilty and await sentencing. A second former FalconStor salesman has resigned.

Authorities allege that Huai and the others paid the bribes between 2007 and 2010. The payments included FalconStor stock, gift cards, dinners and $100,000 deposited into a Las Vegas gambling account.

"Rather than let their product compete fully and fairly in the marketplace, FalconStor resorted to bribery and graft to win important contracts," U.S. Attorney Loretta Lynch said.

The alleged scheme came to light in 2010 when Huai, the former chief executive, contacted an outside lawyer to say one of the salesmen was extorting him, prompting a federal investigation. Huai resigned from the company and began cooperating with authorities.

Founded in 2000, FalconStor provides backup data storage and protection for large corporations. The company has 468 employees, including 200 on Long Island, and offices around the world, including in Europe and Asia.

Through its deal with prosecutors, FalconStor has revamped policies governing gifts, stock options and other matters. If the company continues to comply, prosecutors will dismiss the criminal charges in 18 months. FalconStor is not required to be overseen by a court-appointed monitor.

The company's stock rose 3.42 percent Wednesday, to $2.72 a share.

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