SEC Files Civil Lawsuit Against Comparator
The Securities and Exchange Commission sued Comparator Systems Corp. on Friday, accusing the fingerprint technology company of lying about its finances, stealing its key product and bilking investors for years by selling stock that was virtually worthless.
In a sweeping civil lawsuit, the SEC portrayed Newport Beach-based Comparator as little more than a financial house of cards and is seeking to bar three of the company’s executives from ever serving as officers or directors of any public company.
“What we’re alleging here is that the company is fundamentally fraudulent, that it has no sales, no assets and little or no technology,” said Richard Sauer, a top official with the SEC’s enforcement division. “It appears to exist primarily for the purpose of selling stock to investors.”
Comparator representatives were unavailable for comment.
SEC officials said they obtained a temporary restraining order freezing the assets of the three company executives, Chief Executive Robert Reed Rogers, Vice President Gregory Armijo and Scott Hitt, former executive vice president.
The order, which also prohibits the executives from further violations of securities laws, was issued by a federal judge in Los Angeles, where the suit was filed.
The firm has been under investigation since early May, when trading was halted in the company’s stock after it set three daily trading records on the Nasdaq market and soared thirty-fold in value.
The suit represents an unusually swift and aggressive move by the SEC against a company that was virtually unheard-of a month ago but has since been at the center of a regulatory and media storm. The case has even prompted Nasdaq to launch a broad review of its listing requirements.
The priority of the case within the SEC “was extremely high,” Sauer said. “It was one of the most rapid investigations ever to reach this point and achieve this kind of relief.”
Company executives have repeatedly denied any wrongdoing, and have claimed that the burst in trading of the company’s stock was related to market anticipation of the release of a new fingerprint identification product at an Atlanta trade show several weeks ago.
But in the suit, the SEC alleges that Comparator had no legal right to the device. “In fact,” the suit alleges, “Rogers and Hitt had stolen a prototype of a [fingerprint identification] device developed by individuals not associated with Comparator, who were actively attempting to have the device returned.”
The device was taken from an engineering professor at Edinburgh University in Scotland, Sauer said. Company officials visited the professor several years ago and persuaded him to let them market their device in the United States, he said. Since then, the company has refused to return the device, Sauer said, despite numerous requests from the professor.
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The company repeatedly led investors to believe that Comparator had developed the technology and had obtained patents to protect it, according to the lawsuit.
On the basis of those misrepresentations and others, Rogers, Hitt and Armijo fraudulently obtained at least $2.9 million in proceeds from the sale of Comparator common stock to individual investors, according to the suit. In one case, the company obtained $1.8 million from investors in Malaysia.
In addition, the three executives issued at least 10 million shares of the company’s stock to themselves, and “at least Hitt and Armijo sold substantial amounts of that stock to the public,” the suit said.
According to the suit, the company also vastly overstated the value of its assets in an effort to remain listed on Nasdaq, a sought-after stock market address for small companies. Nasdaq requires companies to have assets worth at least $2 million if their stock trades below $1 per share. Comparator’s shares traded for pennies before soaring as high as $1.88 during last month’s trading binge.
Among the overvalued assets were patents that had expired, subsidiary companies that were inactive and more than $600,000 that had been embezzled by a former employee, according to the suit.
All told, the company claimed an asset base of $5.84 million. “Most of these reported amounts, however, were attributable to the overvaluation of assets that had no future economic benefit, were recorded improperly or did not exist,” the suit alleges.
The SEC also signaled that there is likely to be legal action taken against Comparator as a probe of the company and brokers that sold Comparator stock continues.
“This is a very new investigation,” Sauer said. “Obviously, there will be continuing discovery and continuing litigation.”
A preliminary hearing is scheduled for June 13 in Los Angeles federal court.
