"buying it at 6 cents for eight years, waiting for God
knows what," said Robin Rushing, a trader at La Jolla."
securities.stanford.edu
One of the company's market makers, La Jolla Capital securities.stanford.edu
Management in San Diego said it has sold about 29 million
Comparator shares in the last two days. "We've been
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buying it at 6 cents for eight years, waiting for God
knows what," said Robin Rushing, a trader at La Jolla.
She said Monday's rally alone made nine of the
firm's investors millionaires. 24. On May 7, 1996, it was reported:
More than 1/5 of the NASDAQ volume came from
COMPARATOR SYSTEMS--it lost 1/8 of a point. 177 million
shares were traded in this company--the highest for a
single stock. Steve Young reports the stock of the small
company has been trading at 6 cents a share for 4 years.
Part of the mania for the company is its development of
a fingerprint card for credit systems and other uses.
(SOUND BITE) Robert Rogers, chairman COMPARATOR SYSTEMS,
says we are as stunned as everyone else. The company
plans to introduce its fingerprint device at a trade show
in Atlanta May 14. There are rumors that MASTERCARD was
planning to use the system. MASTERCARD denied the
rumors. Gross revenues of the company last year was $90,000.
25. On May 7, 1996, The Wall Street Journal reported:
Comparator says the burst in trading volume is due
to pent-up demand from plugged-in investors who knew that
the release of the company's new line of "biometric
identity verification systems" was imminent. But the
company didn't formally release news until yesterday that
it planned to introduce its new product line at the
CardTech/SecurTech Exhibition in Atlanta May 14-16.
26. On May 8, 1996, PR Newswire reported:
DIGITAL DESCRIPTOR SYSTEMS, INC. (Nasdaq: DDSI), a
leading manufacturer and marketer of imaging systems for
the municipal and private criminal enforcement markets,
today announced it has finalized a Strategic Marketing
Alliance with Comparator Systems Corporation (Nasdaq:
IDID) whereby Comparator's live fingerprint capture and
compare firmware/software capabilities will be integrated
with Digital Descriptor's law enforcement CompuCapture (R)
2000 Video Imaging System.
27. On May 8, 1996, the San Diego Union-Tribune reported:
La Jolla Capital had been accumulating Comparator
shares for no more than 65 cents each for years, says the
firm's irrepressible B.J. Gallison, president.
Comparator has "a marvelous machine -- it's a very sexy
business," effuses Gallison.
In the big run-up, the firm's customers dumped 16
million to 18 million of those 25 shares. "We
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made multi-clients into millionaires," says Gallison,
admitting that surveillance officials of the NASD
(National Association of Securities Dealers) are already
inquiring about the orgy.
"We've made more gross commissions in the last two
days than in any whole month in the firm's history,"
enthuses Gallison.
That history has been very, very spotty. There have
been disciplinary actions by regulators in South
Carolina, Nevada, Illinois, Iowa and Vermont. A dispute
with Colorado has been going on for a long time.
The firm is fighting NASD charges that it did not
abide by state and federal securities regulations
involving 10 to 25 stocks over a period of a year and a
half. In February, an employee, Sarah F. Pollard, paid
a fine and was suspended as a securities principal for 18
months to settle nondisclosure charges in this matter.
The NASD charged last year that one of the firm's
operations failed to have a supervisory system that
achieved compliance with federal securities laws. That
matter is still pending, too.
Last March, the Securities and Exchange Commission
slapped a cease-and-desist order on Robin Michele
Rushing, a founder of the firm, for violation of securities laws.
28. On May 8, 1996, USA Today reported:
The stock started moving, Armijo notes, on Friday,
the business day before Comparator issued a press release
to drum up attention for its product introduction at a
trade show in Atlanta. * * *
Says Rogers: "We have a large market that we're now
ready to attack." The company believes there is new
demand for such products because businesses are more
concerned about losses from fraud and less concerned about privacy.
* * *
29. On May 8, 1996, the Los Angeles Times reported:
The company went public in 1979, raising $800,000 in
an offering underwritten by Blinder Robinson, a defunct
Denver brokerage once derisively called "Blind'em and
Rob'em." Since then, Comparator has doled out millions
of shares to executives when the company couldn't afford
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salaries, and has issued millions more to settle debts,
pay for acquisitions and raise research funds.
Many of those selling in recent days have been
investors and market makers--brokers who trade the com-
pany's stock--who had picked up Comparator shares for pennies.
"We have been buying Comparator for the last five
years for five or six cents per share," said B.J.
Gallison, president of La Jolla Capital Financial Corp.
in San Diego. "Just today we probably sold 4 million
shares higher than a dollar. We have made dozens of our
clients millionaires over the last few days."
DISCLOSURES OF THE FRAUD
30. The NASD halted all further trading of Comparator on May
8, 1996 and announced that it was initiating an investigation into
market manipulation by broker-dealers, such as La Jolla Capital,
and the Company's public reports. Thereafter, on May 9, 1996, The
Wall Street Journal reported:
Now the NASD is reviewing the stock-trading activity
of the company, asking for copies of recent news releases
and for a demonstration of the product touted for
imminent release in its Monday press announcement.
* * *
"I have not run across this company's products
integrated into the various security systems contracts
that I track," said Jeff Kessler, senior vice president
at Lehman Brothers, who analyzes business services and
security companies. "The companies that I speak to in
the industry have not heard of this company in terms of
competition," he added. * * *
Many stock analysts and executives at similar
security companies said they were skeptical that
Comparator would be able to produce a product innovative
enough to justify the stock's recent run-ups given the
steep competition from more established companies like
Indentix, a Sunnyvale, Calif., maker of fingerprint
scanners and analyzers. * * *
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One of the market makers in the stock, Paragon
Capital, dropped the stock in the past day or two,
traders at other firms said. A Paragon spokesman said he
had no comment about his company's reasons for dropping the stock.
31. On May 9, 1996, Dow Jones International News reported:
The shares of Comparator Systems Corp. (IDID) won't
trade until the company answers publicly some questions
the National Association of Securities Dealers has about
its finances and products, regulatory sources said.
32. On May 10, 1996, the Orange County Register reported:
Regulators Thursday probed brokerage firms that sold
Comparator Systems Corp. stock and sent a special warning
to brokers nationwide about selling speculative, low-
priced shares to investors.
Investigators from the National Association of
Securities Dealers Inc. spent the morning plowing through
paperwork at La Jolla Capital Financial Corp., a San
Diego County company whose clients at one point owned
about one-third of high-flying Comparator's 610 million
outstanding shares, La Jolla Capital officials said.
NASD fired off a memo to all its member firms
Thursday warning brokers that it would investigate market
manipulation, high-pressure sales tactics and fraudulent
mark-ups in low-priced stocks that suddenly jumped in
value or trading volume. NASD advised brokers to take
"special care ... where the securities involved are low-
priced or speculative in nature." * * *
In addition to requesting client lists, Gallison
said regulators also questioned 50 million shares that
the firm traded for itself. Gallison said La Jolla
bought 25 million shares from its customers and sold 25
million shares on the exchange.
33. Within days after the initial NASD probe, Comparator was
forced to make revelations of improper accounting and lack of
financing for development of any products. It also revealed the
lack of any marketing agreements or contracts of sale for its
products. Only after regulators were able to halt trading on
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May 8, 1996 and investigate Comparator and its unprecedented volume
and price movement during the three-day Class Period did they learn
that Comparator had overstated its accounts receivable by $745,000
and that the value of certain Company patents were overstated by
millions of dollars. These overstatements account for 75% of the
Company's previously reported assets. The reduction in assets
places Comparator below the levels required for continued listing
as a public company by NASDAQ. Comparator also admitted that it
had failed to notify investors that it had lost its source of
financing. The company was also forced to admit that it had no
marketing agreements for the development of its newest products and
that it has no contracts of sale for such products. In light of
these disclosures, trading of the Company's stock continues to be
halted by NASDAQ, and members of the public are unable to selltheir shares.
34. La Jolla Capital, a broker-dealer and market maker for
Comparator's stock, engaged in an unlawful market manipulation
through, inter alia, the dissemination to potential investors of
baseless and false rumors about Comparator and the Company's
negotiations with such industry giants as MasterCard for the sale
of Comparator's newest, but as of yet not released, fingerprint
verification technology. Such baseless rumors were spread by La
Jolla Capital and other Comparator market makers for the purpose of
creating artificial demand for Comparator's stock and thus creating
the appearance of active trading and entering purchase orders for
its own account, knowing that it was simultaneously executing sale
orders from its own account. La Jolla Capital, in the spreading of
these baseless and false rumors about Comparator during the Class
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Period, did so with the intent and purpose of inducing the purchase
of Comparator stock.
35. In addition, La Jolla Capital acted as a selling agent
for Comparator's insiders' restricted stock. La Jolla Capital
unlawfully agreed and conspired with these insiders to sell
otherwise restricted, unsellable insider stock by the use of phony
account names, such as "Pathfinder." Through this arrangement, La
Jolla Capital would buy restricted insider shares from Comparator
executives and would then launder and resell them through this
bogus "Pathfinder" account. In return, La Jolla Capital was able
to acquire these shares at far below market prices and was able to
dump these shares for a huge profit. When the stock price of
Comparator collapsed on May 8, 1996, La Jolla Capital had already
unloaded most of the shares it and its customers had acquired for
pennies and was able to reap commissions and enormous profits for
its own trading account. FIRST CAUSE OF ACTION
Violation of §§25400/25500 of the
California Corporations Code
36. Plaintiffs incorporate ¶¶1-35.
37. Acting individually and pursuant to a scheme or
conspiracy or aiding and abetting each other, defendants concealed
and/or misrepresented material adverse information regarding
Comparator and engaged in unlawful market manipulation of
Comparator stock. Defendants' wrongdoing included the making of
and/or participation in the making of, untrue statements of
material facts and the omission to state material facts necessary
in order to make the statements made, in light of the circumstances
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under which they were made, not misleading, and engaging in acts,
practices and a course of conduct, including market manipulation,
which operated as a fraud and deceit upon plaintiffs and members of
the Class in order to induce the purchase of Comparator stock by
plaintiffs and the members of the Class.
38. Plaintiffs and the members of the Class have suffered
substantial damages because, in reliance on the integrity of the
market, they paid artificially inflated prices for Comparator
stock. Plaintiffs and the members of the Class would not have
purchased Comparator stock at the prices they paid, or at all, if
they had been aware that the market price had been artificially and
falsely inflated by defendants' manipulation and misleading
statements and concealments. At the time of the purchases by
plaintiffs and the members of the Class of Comparator stock, the
fair market value of said stock was substantially less than the
prices paid by them.
39. By reason of the foregoing, defendants violated §25400 of
the Cal. Corp. Code, thereby entitling the members of the Class to
recover damages pursuant to §25500. BASIS OF ALLEGATIONS
40. Plaintiffs have alleged the foregoing based upon the
investigation of their counsel, which included a review of
Comparator's SEC filings, securities analysts' reports and
advisories about the company, press releases issued by the Company,
media reports about the Company and discussions with consultants,
and believe that substantial evidentiary support will exist for the
allegations set forth herein after a reasonable opportunity fordiscovery.
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PRAYER FOR RELIEF
WHEREFORE, plaintiffs pray for judgment as follows:
1. Declaring this action to be a proper class action on
behalf of the Class defined herein;
2. Awarding plaintiffs and the members of the Class
compensatory and/or punitive damages;
3. Awarding plaintiffs and the members of the Class
pre-judgment and post-judgment interest, as well as reasonable
attorneys' fees, expert witness fees and other costs;
4. Awarding extraordinary, equitable and/or injunctive
relief as permitted by law, equity and the appropriate state lawremedies; and
5. Awarding such other relief as this Court may deem justand proper.
DATED: May 13, 1996 MILBERG WEISS BERSHAD
HYNES & LERACH LLP
WILLIAM S. LERACH
KIRK B. HULETT
/s/
_____________________________
KIRK B. HULETT
600 West Broadway, Suite 1800
San Diego, CA 92101
Telephone: 619/231-1058
STEYER LOWENTHAL & WALKER
ALLAN STEYER
SCOTT McCRAE
333 Bush Street
26th Floor
San Francisco, CA 94104
Telephone: 415/421-3400
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LAW OFFICES OF ALFRED G.
YATES, JR.
ALFRED G. YATES, JR.
519 Allegheny Building
429 Forbes Avenue
Pittsburgh, PA 15219
Telephone: 412/391-5164
WEISS & YOURMAN
JOSEPH H. WEISS
319 Fifth Avenue
New York, NY 10016
Telephone: 212/532-4171
Attorneys for Plaintiffs
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