REPRINTED FROM THE BUSINESS JOURNAL OF SAN JOSE (and posted over at AOL so don't blame me for finding this tidbit)
May 19, 1997
Identix lDs legal woes
Pete Barlas Business Journal Staff Writer
RLI Insurance Co. has filed suit against Identix Inc. of Sunnyvale,
accusing the fingerprint-scanner maker of restating its revenues before
it signed a contract with the company last year.
RLI is seeking a court order rescinding liability coverage for Identix's
officers and directors.
The lawsuit was filed late last month in Santa Clara County Superior
Court, and last week Superior Court judge Peter Stone took the
unusual step of sealing the court file.
RLI filed suit six months after Identix and two of its executives became
the targets of a shareholder lawsuit.
That suit, filed last October in U.S. District Court in San Jose, charges
Identix chief executive Randall Fowler and chief financial officer James
Scullion with several violations of securities law, including insider
trading.
The shareholder suit said Messrs. Fowler and Scullion sold nearly
100,000 shares of company stock in May 1996--four months before
restating Identix's financial results for the for its 1996 second quarter
showing a loss instead of a profit.
According to court records, Mr. Fowler sold 70,000 shares for
slightly more than
$1 million.
Mr. Scullion sold 28,000 shares for about $424,000.
The two executives sold when the company stock was trading
between $12 and $19 a share. The share price later plunged to $9.88
after Identix restated its earnings.
According to the RLI suit, the Peoria, Ill.-based underwriter signed a
contract with Identix last Aug. 16--two days before an article in the
New York Times referred to "rumored allegations" of insider trading.
On Aug. 26, Identix restated its financial results, disclosing a loss of
$642,000 on revenues of $6.7 million.
Earlier, the company had reported profits of $389,000 on revenues of
$8.8 million for the quarter.
The RLI suit said Identix should have known a restatement of earnings
could subject its officers and directors to legal claims.
RLI further contends that Identix officials never warned the carrier it
was about to restate its earnings.
The insurer said "it would not have entered into the insurance contract
if it had been informed of ... the facts."
RLI specializes in providing property and casualty insurance, surety
bonds and insurance for company directors and officers which
protects them from lawsuits.
RLI reported $301 million in premium sales last year.
Walnut Creek attorney Thomas Holden, who is representing RLI, did
not return phone calls.
Palo Alto attorney Joyce Cartun, who is representing Identix, declined
to comment.
Other legal experts, however, say the case is highly unusual.
They note that insurance companies rarely, if ever, file a suit to rescind
a contract.
Tim Roake, a litigator and managing partner for Palo Alto law firm
Fenwick and West, said insurers that become aware of problems with
clients will exercise a clause in the contract to exclude them from a
certain area of coverage.
"It's more typical for an insurance company to reserve their rights to
exclude something like a class-action suit from the policy," said Mr.
Roake.
Legal experts say sealing court files probably accomplishes little.
"That's very odd, because at that point it's a little too late to get any
copies back," said Palo Alto litigation specialist Ian Feinberg.
Mr. Roake said court files are usually sealed to protect sensitive
company information.
"It's more typical for them to seal those records right away," he said.
Identix's fingerprint scanners are used primarily by law-enforcement
departments and security firms.
c 1997, The Business Journal |
