Melville's FalconStor target of lawsuit, SEC probe

Executives at FalconStor Software Inc. made inside trades of more than 125,000 company shares, selling them for $545,000 at "artificially inflated prices" while withholding negative financial data from the public, a federal class-action lawsuit says.

The allegations came as the Melville company disclosed Thursday in a U.S. Securities and Exchange Commission filing that its accounting practices are under investigation.

The SEC is also looking into claims of improper payments to software vendors by ReiJane Huai, the company's founder and chief executive who resigned in September.

The latest SEC document said the alleged payments were linked to FalconStor's "licensing of software to one customer."

James Weber, the chief financial officer who took over as chief operating officer when Huai left, could not be reached for comment Thursday.

Weber and Huai are named in the shareholder class action filed in U.S. District Court for the Eastern District of New York. The suit also names Wayne Lam, co-founder and vice president.

It claims that as the insider information was later made public the stock began dropping from the "inflated" levels of the shares sold by Huai, Weber and Lam. The three sold their stock beginning in August 2009 for prices as high as $5.20 a share. The stock rose 6 cents to $2.95 Thursday.

Shares fell 18 percent in a day in January after the company said revenue shortfall would cause a fourth-quarter loss. FalconStor makes data backup and recovery software. In its most recent fiscal year, ended Dec. 31, it lost $3 million on revenue of $89.46 million.