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

Case 1:10-cv-04572-ERK-CLP Document 36 Filed 11/03/11 of 26 PageID #: 369

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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


20

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.


21

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.


22

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.


23

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.


24

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,


25

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


26

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


EXHIBIT 1

Case 1:10-cv-04572-ERK-CLP Document 36-1 Filed 11/03/11 Page 1 of 7 PageID #: 395

EXHIBIT 2


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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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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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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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?


THE COURT: Is he capable of understanding the

nature of these proceeding?


THE COURT: Do you have any doubt as to the


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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 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 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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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.



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.



THE COURT: Let me ask the government.

What are the rights of appeal in your agreement


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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 COURT: Are you willing to give up your

rights to a trial and the other rights I have just

discussed?


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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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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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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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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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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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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


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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


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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


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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.)


$

$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


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


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


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


EXHIBIT 3


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

EXHIBIT 4


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2

3

4

5

6

7

8

9

10

11

12

13

14

15

16

17

18

19

20

21

22

23

24

25

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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2

3

4

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9

10

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12

13

14

15

16

17

18

19

20

21

22

23

24

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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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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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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.


treated for narcotics addiction?

THE DEFENDANT: No.


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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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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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.


treated for narcotic addiction?

THE DEFENDANT: No.


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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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.


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.


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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8evidence on your behalf.


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.


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.


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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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.


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.


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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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


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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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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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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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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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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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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.)


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