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) --

FalconStor Software


just had its wings clipped.

The stock was the biggest percentage decliner on the Nasdaq Wednesday after the Melville, N.Y.-based maker of data protection applications announced the surprise resignation of ReiJane Huai, its CEO, president and chairman, after Huai apparently disclosed that "improper payments were allegedly made" in connection with a single customer's contract.

The company said it's cooperating with law enforcement on the ongoing probe of the alleged payments, and that it's appointed its own special committee to conduct a "full internal investigation" of the matter.

FalconStor also quickly put in place an interim CEO and president, James McNeil, its current chief strategy officer, and named CFO James Weber to the added role of chief operating officer on an interim basis. Board member Eli Oxenhorn was named non-executive chairman.

The shares closed down 91 cents, or 22.4%, at $3.15 on volume of 4.1 million, more than 27 times the issue's trailing three-month daily average of around 150,000. The sell-off wipes out an impressive run over the summer for FalconStor that culminated in Tuesday's finish at $4.06. It was the stock's first close above $4 since March 9, and a level that represented appreciation of nearly 60% off its 52-week low of $2.56 on June 29.

Morgan Keegan analyst Brian Freed thought the decline in the shares on Wednesday was appropriate, given the lack of clarity about the nature and depth of Huai's improprieties.

"In the absence of full information, investors generally assume the worst," Freed said in a phone interview with


. "That's what seems to be happening here. The stock is going down to what it would likely fetch in a fire-sale scenario."

Freed currently has a buy rating and a 12-month price target of $4.50 on FalconStor, and he thinks that target is still rational, given the quality of the company's technology, its customer list, and cash reserves. Because of the uncertainty created by the investigation, he thinks the shares are "dead money" in the near-term but said if the issue proves to be minor, the dip will likely be "fairly short-lived."

Removing the alleged improper payments from the equation, Freed felt the departure of Huai was a positive, saying the widespread opinion on Wall Street was that it was time for FalconStor to make a change at the top.

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"Put it this way, when I'm talking to investors today, no one is upset about him leaving," Freed said. "The stock probably would've gone up if the only news was his resignation."

He believes McNeil will eventually move into the role on a permanent basis. If the improper payment issue derails FalconStor and it ends up on the block like so many other tech companies these days, Freed thinks the interest would be high.

"It would be worth at least $100 million to a lot of people in my opinion," he said, mentioning


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FalconStor is slated to report its third-quarter results on Oct. 25. The current average estimate of analysts polled by

Thomson Reuters

is for a loss of 4 cents a share on revenue of $20.1 million.

On July 28, the company reported a non-GAAP

generally accepted accounting principles loss of 4 cents a share on revenue of $20.3 million for the second quarter ended on June 30. Wall Street is expecting a breakeven performance for the fourth quarter with revenue ramping up to $23.4 million.


Written by Michael Baron in New York.

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