.Imagis launches Red Herring lawsuit
2002-09-13 14:43 PT - Street Wire
RED HERRING TALE
by Lee M. Webb
Imagis Technologies Inc., a Vancouver-based biometric company, has launched a defamation lawsuit against U.S.-based Red Herring Communications Inc. and veteran journalist Christopher Byron. Imagis alleges that the company and its management were maliciously defamed in a Red Herring article written by Mr. Byron.
Vancouver lawyer Howard Shapray of Shapray Cramer & Associates filed the lawsuit in the Supreme Court of British Columbia on Sept. 10. No statement of defence has yet been filed.
Red Herring publishes a business magazine carrying the same name as well as Internet articles covering technology, business and the financial markets. Mr. Byron, the author of several books, has been a journalist for more than 30 years. Among other things, he has been a correspondent and editor of Time, assistant managing editor of Forbes and a columnist for The New York Observer. In addition to contributing to Red Herring and other publications, Mr. Byron currently hosts a syndicated radio program.
The lawsuit was filed a day after Imagis issued a news release advising that it knew of "no material changes within the company that would account for the recent decline in the trading price of the company's shares." While it is not exactly clear what Imagis means by "recent decline," the company's share price has dropped more than $4 from the 52-week high of $5.66 reached on March 6. Investors pushed the stock to its 52-week high in record trading in the wake of a craftily worded news release from the Pembridge Group of Boston, Mass., that was widely misconstrued as a $4.10 (U.S.) buyout offer for Imagis.
In fact, as consistently and correctly reported by Canada Stockwatch since March 7, there was no offer and the stock price has been in an overall decline for the past seven months. Imagis closed at $1.40 in the trading session before the company issued its advice that there was no material change that would account for the recent drop in price.
While not directly drawing a connection to the "recent decline" in the stock price, Imagis also used the Sept. 9 news release to allege that the company and its management had been defamed in a Red Herring magazine article published in September. Imagis did not name the author of the alleged defamatory piece, referring to him as "a writer who calls himself the 'Contrarian'." In fact, the writer calls himself Christopher Byron and the article was clearly bylined in his name.
Imagis also neglected to mention that Red Herring had published the article on-line more than a month earlier. The Internet version of the same article appeared on Aug. 5 when Imagis was trading at approximately $1.85. By Aug. 13, the stock was changing hands for as much as $2.40 per share. On Aug. 14, the day Imagis released its second-quarter results reporting that the company had lost $2.79-million through the first six months on revenue of just over $2-million for the same period, the stock price began to slide, struggling to stay marginally above $2 for the next couple of weeks before falling even lower.
On Sept. 10, both the National Post and The Vancouver Sun published reports of Imagis's dark rumblings about the alleged Red Herring defamation. The National Post's Robert Thompson noted that Imagis's stock price "hit $2.10 on Aug. 19," but closed at $1.36 on Sept. 9. While Mr. Thompson's headline characterized Imagis's trading as "fast and furious" on a day when 163,109 shares changed hands on the TSX Venture Exchange, the article made no mention of the more than two million shares swapped at an average price of $5.14 per share in frenzied TSX trading on March 6.
According to Mr. Thompson, Treyton Thomas, chairman and founder of Pembridge and now a director of Imagis, is not "as obscure as the (Red Herring) article suggests." In support of that claim, Mr. Thompson notes that Mr. Thomas led a proxy battle over Sutton Resources Ltd. in 1996. "He would not disclose how many shares he holds in Imagis, but did say it is less than 10%," Mr. Thompson reports.
If Mr. Thomas holds so much as a single share of Imagis, that fact may not be known to the British Columbia Securities Commission (BCSC). According to BCSC records, Mr. Thomas, who became a director of Imagis on July 9, has not filed an insider report. BCSC regulations require such a report to be filed within 10 days of becoming an insider. In exchanges with a Stockwatch reporter brokered by Mr. Shapray, who also represents Mr. Thomas, Pembridge's chairman has twice declined to disclose who has trading authority over securities held by the Boston firm.
The Sept. 10 Vancouver Sun article, written by Harvey Enchin, delved more deeply into Imagis's trading history and mentioned the March 6 "buying frenzy that added about $1.50 to the price of Imagis stock in a single day." Mr. Enchin also noted that the surge in the stock price was triggered by "what was called 'a proposal' to take Imagis private" announced by Pembridge. "But it turned out the offer wasn't an offer and the deal quietly died," Mr. Enchin wrote.
The Vancouver Sun piece carried the headline, "Imagis launches defamation suit." It was a rather prescient headline, given that the article was being read before the courts even opened on Sept. 10, the day Mr. Shapray filed the suit on behalf of Imagis.
At this point, it is not clear exactly when Imagis retained Mr. Shapray. In a telephone conversation with a Stockwatch reporter on July 25, however, the Vancouver litigator, then representing Mr. Thomas, made it clear that he was not working for Imagis. "I've read the articles about Trey (Mr. Thomas) and, to some extent, about Imagis--and I want to make it clear that I don't act for Imagis, okay--and I'm just sort of wondering why you're taking Trey on this way and, you know, maybe there is some misconception or something that I can straighten out," Mr. Shapray said.
During the same conversation, Mr. Shapray declined to talk about anyone else involved with Imagis. "I'm not going to talk about anyone else," Mr. Shapray said. "I don't represent anyone else. I'm not going there." Indeed, Mr. Shapray seemed to make some effort to put some distance between Imagis and both his client, Mr. Thomas, and himself.
While Mr. Shapray did not want to talk about anyone else associated with Imagis, by Aug. 6 he had a few thoughts to offer about Mr. Byron, the author of the Red Herring article that allegedly defames Imagis. In an E-mail to a Stockwatch reporter, Mr. Shapray indicated that his efforts to broker an exchange with Mr. Thomas had been hampered by a recent event. "The event in question is the appearance of an article, authored by Mr. Christopher Byron, in Red Herring, that has a very distinct aroma of your direct collaboration," Mr. Shapray wrote.
"In fact, you may wish to examine the article to see if it meets with your definition of plagiarism," Mr. Shapray continued. "Because of your rather long delay in posing the questions to Mr. Thomas and the untimely appearance of Mr. Byron's article, which may itself be actionable, my client suspects that there is more than just coincidence between the fact of my communication with you and the appearance of Byron's text."
If there is anything more than just coincidence between the fact of Mr. Shapray contacting a Stockwatch reporter to mediate an exchange with Pembridge's chairman, or perhaps deliver a whiff of the grapeshot, and the appearance of Mr. Byron's article, perhaps it rests with Mr. Thomas. Mr. Thomas clearly knew well before July 25 that Mr. Byron was working on an article involving Imagis. Setting aside Mr. Thomas's spurious suspicion and Mr. Shapray's specious suggestion of collaboration, the Vancouver litigator's musing about the possibility of legal action against Mr. Byron now seems at least as prescient as the Vancouver Sun headline.
The Red Herring libel suit filed on behalf of Imagis by Mr. Shapray alleges that Mr. Byron's article "contained statements and innuendo that were false and defamatory of Imagis." The entire text of the article is attached to the statement of claim with the allegedly defamatory words italicized.
According to the statement of claim, the "defamatory words meant and were understood to mean, directly or by imputation," that "Imagis had only one software product that only stores photographs of 'known terrorists' used for screening, surveillance and crowd control." That alleged meaning and understanding, directly or by imputation, is apparently based on something Mr. Byron wrote in the article, though it might be difficult to find without Mr. Shapray's handy italics and perhaps even barely recognizable when read without his interpretive gloss. "Investors are said to be particularly smitten by Imagis's biometric technology--facial recognition software that digitally stores photographs of known terrorists, then matches them against live human beings at places like police stations and airports," the evidently offending italicized section states.
In fact, Mr. Byron's claim quite likely rings true with many investors and market watchers and there is almost certainly ample evidence to support it in media reports, Imagis's own news releases and promotional efforts, the extravagant touting of newsletter writers like James Dale Davidson and, among other things, the cheerleading on Internet chat sites. Beyond that, a quick look at the company's stock price prior to Sept. 11, 2001, when Imagis shares were changing hands for as little as 56 cents might provide at least a hint of the impact of the post-Sept. 11 market interest in biometric technology in general and facial recognition technology in particular.
"While the use of Imagis' technology for recognition of terrorists is one such application, to date the majority of Imagis' customers have been law enforcement agencies who utilize its software to manage arrests and bookings, assist in identifying criminals, and assist in investigations," Imagis offers as a counter to Mr. Byron's allegedly defamatory claim. That, too, has the ring of truth; though it hardly seems to have the glamour or excitement to produce many smitten investors.
According to the statement of claim, Mr. Byron's report that "Imagis claims to have more than 100 installations of its software" actually means, directly or by imputation, that the claim is probably false. The basis for this allegation perhaps remains a mystery to those not imbued with Mr. Shapray's gift for imputation. In any case, Imagis does claim to have more than 100 installations of its software. Indeed, as disclosed in the lawsuit, Imagis claims that it has over 140 installations of its software.
In an open letter to shareholders published on Sept. 12, Imagis makes a more exact claim regarding the number of software installations. "In fact, the precise current number is 141," the letter claims. Apparently also endowed with a gift for ferreting out hidden meaning, the author or authors of the letter signed by Iain Drummond, Imagis's president and chief executive officer, claims that Mr. Byron "chose to make the insinuation that the Company's claim is not true." Whether the gifted letter writer has yet recognized the peculiar nature of levelling that particular allegation using that phrasing, specifically, "the Company's claim," is an open question.
The statement of claim further alleges that Mr. Byron's article defamed Imagis, including its management and directors, directly or by imputation, by using words that meant "Imagis is merely another 'Vancouver penny stock', the price of which is manipulated by 'denizens of the penny stock world' and 'characters who lurk there.'"
Interestingly, some parts of that allegation are reminiscent of comments recently made to a Stockwatch reporter by Mr. Shapray prior to being retained by Imagis. Those comments were put forward as part of Mr. Shapray's effort to establish some distance between Mr. Thomas, Pembridge's chairman, and Imagis. "Well, what I understand, and this is something that I have to verify, is that the only reason Pembridge sort of has any interest in any company that happens to lurk in Vancouver is because of the technology that Pembridge really believes in and believes is an important technology for the new world since 9/11," Mr. Shapray said on July 25.
Just what is to be made of Imagis's litigator's remark about any company that happens to lurk in Vancouver is another open question; but, given his demonstrated talent with similar material, Mr. Shapray might very well be able to make something actionable out of it, if the remark was not his own. Indeed, the sometimes bombastic Mr. Shapray frequently seems to follow the Humpty Dumpty school of semantics. "When I use a word, it means exactly what I choose it to mean; neither more nor less," the famous Lewis Carroll character proclaimed.
In the same July 25 conversation, Mr. Shapray suggested that Mr. Thomas "got his fill of Vancouver generally" during the Sutton proxy battle. When a Stockwatch reporter pointed out that Mr. Thomas was now a director of Vancouver-based Imagis, Mr. Shapray at first declined to offer any comment regarding that development. "I'm not going to speak to that," he said. "I'm sure that he can answer for that, but that may be no more than his genuine interest in the company and the development, I guess, of this joint venture or whatever has been recently announced," the lawyer opined. "The point, I guess, to make is that being interested in a piece of important technology is one thing and being interested in a stock play is another."
In an Aug. 6 letter, Mr. Shapray served up yet another intriguing comment while delivering a presumptuous pronouncement and waxing eloquent about journalistic ethics. "While I understand that you may have instinctively felt that anyone associated in a relationship with a Vancouver based company such as Imagis may have some tarnish, I also think that you, as a professional journalist, should be hypersensitive to the terrible unfairness of the McCarthyite tactic of implying guilt through some poorly defined association," Mr. Shapray wrote. That grandiloquent snippet of prose, which might have the makings of significant piece of legal work in the hands of even a modestly gifted practitioner of the fine art of drawing out alleged imputations and innuendo, was apparently written only a couple of weeks before Mr. Shapray signed on as Vancouver-based Imagis's litigator.
The statement of claim goes on to allege that Mr. Byron's article also contained claims meaning that "the directors of Imagis did not perform reasonable due diligence on Treyton Thomas ('Thomas'), an advisor and director of Imagis, before entering into an advisory agreement and offering him membership on Imagis' board because Thomas was, as alleged in the Article, a mysterious, unreliable, unsuccessful person who had been unable to hold steady employment, who did not pay his liabilities, and who ran a fly-by-night operation that may not exist at all."
Rather than address exactly what Mr. Byron did write about Mr. Thomas, or even what Imagis alleges he actually meant by what he wrote, the statement of claim offers what it claims are the facts about the due diligence conducted before Mr. Thomas was appointed to the board of directors. "Before appointing Mr. Thomas to the board, inter alia, Imagis conducted personal interviews with him and several investment banking firms in the United States and Canada and received from Mr. Thomas a completed personal information questionnaire in the form prescribed by the TSX Venture Exchange (the 'Exchange') and the form prescribed by the British Columbia Securities Commission (the 'Commission')," Imagis claims, not bothering to identify the investment banking firms.
"Each of these requires detailed information provided by the applicant and must be filed by each director and officer of a public company in British Columbia or a company listed on the TSX Venture Exchange," Imagis's account of the facts continues. "The information required by each of these agencies, which regulate securities issuers, is extensive and must be provided by the applicant under oath. These applications are also reviewed by the Exchange and the Commission. The disclosure requirements for directors are considerably more onerous in Canada than in the United States as the Securities and Exchange Commission does not have a similar procedure."
It is not known whether anyone from Imagis interviewed by Mr. Byron while preparing the article apprised him of this account of the facts regarding the company's due diligence relating to Mr. Thomas. In any event, the personal information form upon which Imagis's account places so much emphasis is a confidential document rarely available to journalists. From time to time, however, a personal information form does somehow make its way into a journalist's hands.
Some journalists who, like a Stockwatch reporter, have come into possession of a personal information form might well arch an eyebrow at the claim that the information required in completing the document is extensive or that the level of disclosure required is at all onerous. The first four pages of the document look much like an employment application form, requiring information such as name, address, employment history, education history, and so on.
The bulk of the remainder of the form can be completed by placing the appropriate checkmarks in boxes labelled "yes" or "no." A full page of the form, for example, is devoted to questions regarding administrative proceedings. If the applicant has not been involved in any administrative proceedings, it is a simple matter to run down the column placing checkmarks in the "no" boxes. Another full page is given over to questions regarding bankruptcy and civil proceedings against the applicant, if any, and the same checkmark procedure applies. A further page and a half is devoted to questions answerable in the same manner, to the best of the applicant's knowledge, regarding proceedings against an issuer with which the applicant has been a director, officer, promoter, or insider.
As noted by Imagis in its Sept. 10 statement of claim and again in its Sept. 12 letter to shareholders, details in the personal information form are provided under oath. Consent is also provided for regulators to obtain information about the applicant from any source. While regulators are reticent about discussing how much effort is put toward actually checking the background of directors and officers, there have been occasions when applicants have not received regulatory approval; and from time to time a successful applicant has subsequently been sanctioned for not providing full and accurate disclosure in the oath-backed personal information form. There is nothing to suggest, of course, that Mr. Thomas or anyone else associated with Imagis has provided anything but full and accurate disclosure to regulators.
Notwithstanding Mr. Thomas's well publicized advocacy of corporate governance and transparency, served up in flowery accounts of Pembridge and its chairman, he has been somewhat less than forthcoming in providing information regarding his Boston-based firm to a Stockwatch reporter. In an exchange brokered by Mr. Shapray, Mr. Thomas has declined to disclose where Pembridge is incorporated, how much money it has under management, how many employees the firm has, and the location of the offices from which its reported "team of research analysts and portfolio managers" and any other employees work. Pembridge's chairman has also refused to disclose how many shares of Imagis the company holds, only claiming that it is less than 10-per-cent of the outstanding shares. Mr. Thomas has twice refused to disclose who has trading authority over whatever number of Imagis shares Pembridge holds.
Among other things, the statement of claim alleges that Mr. Byron's article represents that the directors of Imagis improperly issued 50,000 warrants to Mr. Thomas; "improperly, or in bad faith" issued 185,000 options to insiders and 200,000 warrants to outside promoters "in exchange for their stock touting services"; and authorized the issuance of six million shares "in a manner that was improper, contrary to applicable securities laws and/or contrary to their duties as directors."
Imagis counters those alleged "false, misleading and defamatory words and imputations" allegedly maliciously written by Mr. Byron deeper in the statement of claim. "Imagis did not 'pump out' shares and warrants as alleged; Imagis never issued warrants to anyone in exchange for 'stock touting services'," Imagis states. "Any capital stock of Imagis that was issued, was issued by the directors acting in the best interests of the company and in accordance with applicable securities laws."
Imagis also takes exception to Mr. Byron's alleged suggestion that the company did not have sufficient business, cash flow or business opportunities to continue as a going concern. That allegation evidently turns on Mr. Byron's claim that "the company's auditors flagged its financials with a 'going concern' warning in March, and little has happened since to improve the outlook."
Imagis counters with the claim that the warning "is routine and mandatory" under Generally Accepted Accounting Principles (GAAP) for any development stage company that is not yet profitable or has insufficient capital to finance operations for at least one year without raising additional money. "Imagis is a solvent company and a going concern," the company states. "If Images (sic) is able to raise capital in the ordinary course or to enhance its sales, it has an excellent future potential for profitable operations."
The statement of claim also alleges that Mr. Byron's article suggested that Imagis's management "did not know how to properly run a company" and that, for the reasons allegedly stated, was "a bad investment."
According to the statement of claim, the allegedly defamatory article was distributed electronically and "read by residents of British Columbia and elsewhere" and prompted comments on Internet chat sites. "As a result of the Article by the Defendants, Imagis became the topic of derogatory comment on Internet bulletin boards and 'chat rooms' located in Vancouver, B.C., and elsewhere," Imagis claims.
A quantitative analysis of derogatory comments on Internet chat sites featuring public "discussions" of Imagis would likely reveal that reporters have been the subject of far more derogatory remarks than the company. Mr. Thomas, an Imagis director, provided his perspective on Internet discussion sites to a Stockwatch reporter. "If I told you what I thought of 95% of the content on message boards, you could not print it," Mr. Thomas commented. "Rather than seminal debate and ideation, some boards evolve into what could be better defined as ranting in either a unilateral positive, or negative, disposition on a particular company," he added. "I believe any analyst who visits a board of a company they cover does so with a jaundiced eye."
Imagis claims that despite the warnings it issued to Red Herring and the "presentation of factual information to refute the false claims," the company refused to publish any retraction or remove the article from its Web site. On the contrary, Imagis states, the article was republished in Red Herring magazine. "By reason of the publication and republication of the defamatory words in the Article, the Defendants have falsely and maliciously damaged the business, reputation and goodwill of Imagis and the manner in which Imagis's affairs are conducted," the company claims. Imagis is seeking unspecified general damages, punitive damages, aggravated damages, interest and such "further and other relief as to this Honourable Court may seem just."
Mr. Byron declined comment regarding the article or the lawsuit. Blaise Zerega, Red Herring's editor, advised Stockwatch that the company had not been served with the lawsuit as of Sept. 12. Mr. Zerega deferred discussion of specific allegations made by Imagis pending receipt of the lawsuit and review by Red Herring's legal advisers. Nonetheless, he was quite clear that Red Herring stood behind Mr. Byron's article and denied that it contained any factual inaccuracies. "We stand behind the story," Mr. Zerega said. "It is fully accurate and it is part of our tradition of insightful, groundbreaking journalism."
With only 7,000 shares changing hands on the TSX, Imagis closed at $1.55 on Sept. 12. In more active trading on Sept. 13, Imagis was up marginally to $1.56 on a volume of 74,200 shares.
Comments regarding this article may be sent to lwebb@stockwatch.com.
(More information regarding Imagis Technologies is available in Canada Stockwatch articles published on March 7, 11, 15, 25, 27 and 28; April 2, 9 and 16; May 17, 23 and 30; June 4, 11, 18, 26 and 28; and July 3, 12 and 18; and Sept. 12, 2002.) |
