SEC Condemns O.C.’s Comparator as a Sham

NEWPORT BEACH —  Federal authorities filed a sweeping civil lawsuit against 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.

Filed by the Securities and Exchange Commission, the lawsuit portrays Comparator as little more than a financial house of cards, and seeks to bar three of the company’s top executives from ever serving as officers or directors of any public company.

SEC officials said they obtained a temporary restraining order freezing the assets of the three company officials, including Chief Executive Robert Reed Rogers, former Executive Vice President Scott Hitt and Vice President Gregory Armijo.

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.

“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, branch chief with the SEC’s division of enforcement. “It appears to exist primarily for the purpose of selling stock to investors.”

Comparator officials were unavailable for comment.

The tiny Newport Beach company has been under investigation since early May, when regulators halted trading in the company’s stock after it set three daily trading records on the Nasdaq market and soared thirtyfold 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.”

Sauer said the fingerprint identification technology was developed by Peter Denyer, professor of engineering at Edinburgh University in Scotland. After apparently reading about Denyer’s invention in a newspaper, Sauer said, Rogers and Hitt flew to Scotland in 1991 and met with Denyer.

Denyer turned over the device to Rogers and Hitt, Sauer said, after the pair told the professor they would take the product to the United States where they would try to find a market for it.

But Rogers and Hitt never did so, Sauer said, and the pair kept the lone device despite repeated demands by Denyer for its return. Sauer said the device was returned to Denyer in 1994. But by then, SEC investigators said, Rogers and Hitt were making claims in a videotape and other presentations to investors that the device was uniquely theirs and that they had acquired patent protection on it.

If the SEC allegations are true, then Comparator appears to have shown a copy of the stolen device at an Atlanta trade show and in product demonstrations, including one for SEC officials.

Denyer, reached at his home in Scotland early today, declined to comment.

Based on those misrepresentations about the device and others, Rogers, Hitt and Armijo fraudulently obtained at least $2.9 million in proceeds from the sale of company common stock to individual investors, according to the suit. In one case, Comparator obtained $1.8 million from investors in Malaysia.

In addition, the trio of 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.

The company also vastly overstated the value of its assets in an effort to remain listed on the Nasdaq stock market, 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 further legal action taken against Comparator is anticipated, as investigators continue to probe the company, as well as brokers that sold Comparator stock.

“This is a very new investigation,” Sauer said. “Obviously, there will be continuing discovery and continuing litigation.”

A preliminary hearing of the case is scheduled for June 13 at federal court in Los Angeles.

Times staff writer Don Lee contributed to this report.

(BEGIN TEXT OF INFOBOX / INFOGRAPHIC)

Comparator Chronology

* May 3: Comparator Systems Corp.’s share price more than triples, and its stock sets a record with more than 121 million shares traded for the day on the Nasdaq market.

* May 6: Comparator shares soar again, making it the most actively traded stock in the U.S.

* May 7: Comparator’s share price tumbles after Mastercard International denies speculation that it has selected Comparator to provide a fingerprint identification system.

* May 10: In response to inquiries from Nasdaq investigators, Comparator discloses that it does not have the funding to produce its new product, that it failed to inform investors when a major funding source fell through last year, and that it may have overstated the value of three-fourths of its corporate assets.

* May 13: Comparator shareholders file suit claiming false statements and manipulations.

* May 14: SEC suspends trading of Comparator’s stock for two weeks just as the company unveils its new fingerprint identification devise to a skeptical crowd at an Atlanta trade show.

* May 16: Comparator reports a third-quarter loss of $289,442

* May 22: SEC investigators visit Comparator’s offices to examine the firm’s new fingerprint identification device.

* May 28: Nasdaq officials order another suspension the day before Comparator’s shares are scheduled to resume trading.

* May 31: SEC officials file civil fraud charges against Comparator and three of its top executives.

Source: Times reports, Bloomberg Business News

Researched by JANICE L. JONES / Los Angeles Times