Imagis Red Herring allegations denied in defence filing
Friday October 25 2002 Street Wire
Also Imagis Technologies Inc (IGSTF) Street Wire
NO HARM, NO FOUL
by Lee M. Webb
Imagis Technologies Inc., a heavily promoted Vancouver-based biometric player, has received a statement of defence from Red Herring Communications Inc. and veteran journalist Christopher Byron in response to a libel suit over an unflattering article. David Sutherland of David F. Sutherland & Associates filed the statement of defence on behalf of Red Herring and Mr. Byron in the Supreme Court of British Columbia on Oct. 23.
Howard Shapray of Shapray Cramer & Associates filed the defamation suit on behalf of Imagis in the B.C. Supreme Court on Sept. 10. Imagis alleges that Mr. Byron maliciously defamed the company in an article first published on the Internet by California-based Red Herring on Aug. 5 and subsequently republished in the September print edition of Red Herring magazine.
Mr. Shapray, litigator of choice for many Vancouver promoters, filed an amended statement of claim on Sept. 27, adding some more defamation allegations. According to Imagis, Red Herring further libelled the company on Sept. 10 by claiming that it stood behind Mr. Byron's twice-published article. Imagis also alleges that a so-called "second article" published on Red Herring's Web site on Sept. 13 added to the defamation by claiming that Mr. Byron's article was true and accurate.
In the 16-page statement of defence filed by Mr. Sutherland, Red Herring and Mr. Byron deny the substantive allegations in the amended statement of claim and deny liability.
NO JURISDICTION
Mr. Sutherland opens the statement of defence by claiming that the B.C. Supreme Court does not have jurisdiction in the matter. According to the statement of defence, "there is no jurisdiction simpliciter for this action" in the B.C. Supreme Court and, in any event, the court "ought, in all of the circumstances of the case, to decline jurisdiction as forum non conveniens."
According to a recent paper on international litigation written by Peter Pliszka and Tate McLeod of Fasken Martineau DuMoulin LLP, the issues of "jurisdiction simpliciter" and "forum non conveniens" are central to the changing landscape of Canadian private international law. In particular, these issues are key to a court assuming jurisdiction over an action against a foreign defendant.
The matter of jurisdiction simpliciter, specifically whether there is a "real and substantial connection" between the action and the court, is a threshold issue. "Even if the jurisdiction simpliciter test is met, a Canadian court may still decline jurisdiction on the basis that it is not a convenient or appropriate forum to hear the action," Mr. Pliszka and Mr. Tate write.
According to Mr. Pliszka and Mr. Tate, factors that the courts regard as relevant in a determination of the issue of forum non conveniens include the location of the majority of the parties and key evidence, location of key witnesses, whether a party would be deprived of legitimate personal or juridical advantage that would be available in a competing jurisdiction, and the relative ability of the plaintiff to seek immediate execution after judgment in the competing jurisdiction.
In the statement of defence, Mr. Sutherland notes that both of the defendants are domiciled and resident in the U.S. The defendants' lawyer states that the alleged publication "concerns a description of activity conducted in the United States by the Plaintiff, which description gives rise to a claim for loss of reputation that was crafted by the Plaintiff and aimed by the Plaintiff at American investors."
Mr. Sutherland also claims "the principal individuals whose activities on behalf of the Plaintiff are discussed in the alleged article at issue are individuals resident in Dallas, Texas (in the case of Oliver Revell) and Boston, Massachusetts (in the case of Treyton Thomas)." According to Mr. Sutherland, Imagis's "primary object in much of its activity is to arrange its listing on the American Stock Exchange."
The lawyer for Red Herring and Mr. Byron goes on to claim that neither defendant has any property in Canada. Mr. Sutherland also claims that of the approximately 425,000 copies of Red Herring sold, less than one-half of one percent of that total are sold in Canada and few of those 2,100 copies of the magazine are actually sold in British Columbia.
Rounding out his claims on the subject, Mr. Sutherland states that "it is a fact that American courts will not enforce Canadian libel judgments that would not, on constitutional grounds, be available in the United States" and "that a resulting judgment herein would not be enforceable is true of this case, and is a factor to be taken into account in assessing forum non conveniens."
NOT DEFAMATORY
According to the statement of defence, the words that drew a libel suit from Imagis were not defamatory. "If the words complained of were published by these Defendants, as alleged or at all, which is not admitted but specifically denied, then these Defendants say, as the fact is, that the words in their context are not capable, as a matter of law, of a defamatory meaning, and these Defendants deny any liability in the premises," the defendants claim. The statement of defence goes on to claim "that the words in their context did not bear, as a matter of fact, a defamatory meaning."
CONSENT
Approximately eight pages of the 16-page statement of defence are given over to claims regarding the plaintiff's alleged "express and implied leave and licence" to publish the words contained in the Red Herring article. In providing the particulars of this alleged consent in the statement of defence, Mr. Sutherland draws heavily on Imagis's filings with the U.S. Securities and Exchange Commission (SEC) and other public disclosures by the company.
In its statement of claim, Imagis took exception to Mr. Byron's allegedly defamatory remarks regarding the company's facial recognition software in the context of identifying terrorists. According to Mr. Sutherland, however, Imagis's own SEC filings provide express and implied consent for Mr. Byron's account. The statement of defence alleges that a Sept. 20 Imagis SEC filing "specifically acknowledges that the terrorist attacks of September 11, 2001 greatly heightened awareness of the company among the investing public."
Mr. Sutherland also claims on behalf of the defendants that Imagis's own news releases emphasized the usefulness of the company's products in identifying terrorists. "Between the terrorist attacks of September 11, 2001 and the alleged publication of August 5, 2002, the Plaintiff distributed many promotional press releases to American media via the PR News wire, which expressly called attention to the usefulness of the Plaintiff's products in identifying terrorists, 15 of which contained the following assertion verbatim: Imagis' technology has been endorsed by leading security agencies and police organizations around the world as an effective measure in identifying criminals, reducing fraud, assisting investigations, and preventing terrorism."
According to the statement of defence, Imagis was not at all shy about playing up the terrorist-identification aspect of its technology in the press, either. "Of the stories in the Lexis Nexis news database between September 11, 2001 and the time of the alleged publication which mentioned the Plaintiff company and included substantive information about it, many stories dealt with the company in the context of the heightened threat of terrorism after September 11, 2001, and many of those stories did so with the help, encouragement or acquiescence of the Plaintiff, including comments to the general, business and trade press from the CEO and President of the Plaintiff, Iain Drummond," Mr. Sutherland claims, going on to provide several examples of Mr. Drummond's upbeat comments to the press.
(As Mr. Sutherland was filing the statement of defence on behalf of Red Herring and Mr. Byron, Imagis was still touting its facial recognition technology as a deterrent to terrorism. According to an Australian news service, Imagis spokesman Roger Henning was touting the biometric technology at a security conference in Adelaide on Oct. 23.
"Spokesman Roger Henning says the technology would have picked up suspected terrorists on international watch lists, such as alleged September 11 terrorist, Mohammed Atta," ABC News reported.
Mr. Henning evidently had more to say. "If you look at the footage of Atta going through Boston Logan Airport, he goes up at the security cameras and smiles because he knows they're not linked to anything," Mr. Henning reportedly told ABC.
The Herald Sun also carried a report on the Adelaide conference featuring comments from Mr. Henning. "Mr. Henning, who unveiled the prototype at a national intelligence officers conference in Adelaide, said the unit would 'dramatically reduce the risk of terrorism,'" the paper reported on Oct. 24.
According to the newspaper, the facial recognition unit unveiled by Mr. Henning "has been developed in Perth over the past nine months by Singapore-based company emBiosys and using Imagis Technologies' facial recognition systems." Oddly, Imagis, which is not known for passing up promotional opportunities, has not made any mention of this Singapore-based company in press releases or regulatory filings, as far as Stockwatch has been able to determine.)
Imagis also took exception to Mr. Byron's comment that the company "claims to have more than 100 installations of its software," alleging in its statement of claim that the comment was defamatory. In the statement of defence, Mr. Sutherland once again turns to Imagis's own public disclosures in which the number of claimed installations varies considerably.
"In successive unaudited press releases (Dec. 12, 2001, Jan. 3, 2002), the Plaintiff initially stated that it had 'over 130 national and international installations with over a thousand users of its software, including its biometric facial recognition technology,' but later (Jan. 3, 2002) said, in its unaudited 10Q with the SEC: Imagis currently has well over a hundred installations...," Mr. Sutherland claims.
"Thereafter, on March 21, 2002, the Plaintiff filed (for public consumption) with the SEC an audited 10K filing in which the Plaintiff stated: 'Its products are currently installed or on order in over 100 sites...' which statement by the auditors was filed by the Plaintiff and which represented the only independently verified statement at the time of publication," the statement of defence alleges. In other words, Mr. Byron's use of the word "claims" was justified.
(In a seven-page open letter to shareholders published on Sept. 12, Imagis indignantly took up the matter of its claimed installations. "Mr. Byron could have verified that Imagis does not just 'claim' to have over 100 installations; it actually does have well over 100 installations," Mr. Drummond wrote. "In fact, the precise current number is 141."
In a Sept. 20 prospectus filed with the SEC, however, that "precise current number" was replaced with several less precise claims. In the prospectus summary, Imagis claims to have "more than 140 installations" of its products, but on page 15 the company claims to have "more than one hundred installations." A few pages further on, the claim changes again to include installations on order. "Our products are currently installed or on order in over 140 sites," Imagis claims in the third version of the number of installations.)
Imagis also took umbrage at being described as a Vancouver penny stock, alleging in its statement of claim that this was tantamount to claiming that the company is a scam. In the statement of defence, Mr. Sutherland again points to the company's SEC filings and, in particular, the warning that Imagis's shares are "subject to the SEC's penny stock rules." By SEC regulations, Imagis is in fact a penny stock.
In its statement of claim, Imagis alleged that Mr. Byron made a number of defamatory claims involving Treyton Thomas, the chairman and founder of an obscure Boston-based alternative asset management firm, the Pembridge Group, which issued a craftily worded press release on March 6 that was widely misinterpreted and misreported as a $4.10 (U.S.) per share buyout offer for Imagis. Imagis hired Pembridge as a financial adviser just two months before the firm issued its widely misconstrued news release just as the trading restrictions on millions of Imagis shares were expiring. Mr. Thomas was appointed to Imagis's board of directors on July 9.
According to the statement of defence, Imagis "did nothing to dispel the impression left by the press release of March 6, 2002," issued by Pembridge. As previously reported by Stockwatch, the company actually reinforced the misinterpretation of the press release by making a link available on its Web site to a March 12 story by CBC Newsworld that incorrectly reported that a $90-million (U.S.) buyout offer had been made for Imagis. Moreover, on March 13 Mr. Drummond repeatedly told an audience at the Sutton Place Hotel in Vancouver that an offer had been made.
The statement of defence goes on to allege that the plaintiff and its representatives implicitly consented to Mr. Byron's alleged description of Mr. Thomas and his Boston-based firm by refusing to respond to repeated questions when they knew full well that an article would be published.
"Prior to the alleged publication, these Defendants repeatedly asked the Plaintiff and its associates and affiliates, orally and in writing, to provide specific details of substantiation of the existence of any hedge fund and for substantiation of related representations concerning Treyton Thomas, PVP (Pembridge Venture Partners) and PG (Pembridge Group)," Mr. Sutherland claims in the statement of defence. "The Plaintiff and its associates and affiliates acknowledged the requests but failed to provide the specific details of substantiation and avoided these Defendants' questions and declined to answer them in a manner and in a context and over a period of time which implied consent to publication of a statement that the hedge fund 'may or may not exist'."
According to the statement of defence, Mr. Drummond and Mr. Revell declined to respond to repeated requests for information about Mr. Thomas and his $600-million fund "in a context in which the failure to answer constitutes implicit consent to a description of Mr. Thomas as 'mysterious' and of his public assertions respecting a hedge fund as 'claims'."
Among other things, the statement of defence also takes up the issue of Altaf Nazerali's role in the company and his influence in the appointment of Mr. Revell as chairman of Imagis. Mr. Sutherland claims that the company's board of directors consisted of five people at the time of Mr. Revell's appointment. "Two Board members, Sandra Buschau and Rory Godinho, were long-time associates of Altaf Nazerali, and that the three (the 'Nazerali Group') controlled the Board, as was known by the plaintiff at all material times to be true and to be reasonably inferred by the market and business press from past transactions and from Altaf Nazerali's appointment as CEO," the statement of defence alleges.
"Prior to publication, when these Defendants pressed the Chairman (Revell) and the CEO/President (Drummond) of the Plaintiff for financial information about the role of Treyton Thomas, these Defendants were referred by both the Chairman and the CEO to Altaf Nazerali, which referral meant and was understood to mean that Mr. Nazerali was substantially in control of the management of the Plaintiff," the statement of defence claims. "Appointment of Mr. Revell as Chairman on January 29, 2000 arose from a Board which was controlled by the Nazerali Group, and Altaf Nazerali in particular."
FAIR COMMENT
After addressing other allegations made by Imagis against Red Herring and Mr. Byron, the defendants' lawyer advances another claim in the statement of defence.
"If the words complained of were published by these Defendants, as alleged or at all, which is not admitted but specifically denied, then these Defendants say, as the fact is, that the words were fair comment on a matter of public interest, namely whether the publicly-listed stock in the Plaintiff company was a good investment," the statement of defence claims.
According to the statement of defence filed by Mr. Sutherland, the facts upon which the alleged comments in Mr. Byron's column are based include public filings, communications and failure to respond to enquiries as set out in the statement of defence.
QUALIFIED PRIVILEGE
After providing the particulars of the claim of fair comment on a matter of public interest, the statement of defence claims that the words complained of by Imagis "were published on an occasion of qualified privilege, both at statute and at commonlaw." In particular the alleged publication was "a fair and accurate report published in a public newspaper or other periodical publication" for the information of the public.
"In the alternative, the qualified privilege stems from a common and corresponding interest or legal or social or moral duty on the basis that these Defendants are specialist reporters in respect of business affairs and investments and the readers of the corporate Defendant's periodical are the investing public with an interest in the affairs of publicly-listed stock companies and their announcements and the publicly available indicia of the quality of the management of stock companies," the statement of defence claims.
JUSTIFICATION (TRUTH)
Having worked through some detailed claims that might leave some lay readers puzzling over the legalese, the statement of defence turns to a rather blunt claim. "Further or alternatively, if the words complained of were published by these Defendants, as alleged or at all, which is not admitted but specifically denied, and if and insofar as the words complained of meant that there were reasonable grounds for suspecting that the stock in the Plaintiff was a poor investment, the words are true in substance and in fact or so close to true so as to justify the sting of the words (which is denied)," the defendants claim.
CONTRIBUTORY NEGLIGENCE
Nearing the end of the statement of defence, the defendants claim that Imagis "by its own fault contributed to the publication" of the allegedly defamatory article. Particulars of the contributory negligence include filing incorrect disclosures with governmental agencies; failing to correct filings; providing incorrect information to the defendants in circumstances in which publication was to be expected; failing to correct misstatements of fact; and failing between July 19 and July 31, 2002, to respond to the substance of questions from the defendants.
NO DAMAGE
Rounding out the statement of defence filed by Mr. Sutherland, the defendants claim that the plaintiff did not suffer any damage.
"In the alternative, if these Defendants published the words complained of and if they were defamatory, all of which is not admitted but specifically denied, then these Defendants say, as the fact is, that the words did no appreciable damage to the Plaintiff's reputation and these Defendants say that the Plaintiff ought not to have sued and ought only to recover contemptuous damages and ought to bear all costs," the statement of defence claims. "Wherefore these Defendants submit that this action be dismissed with special costs or, in the alternative, increased costs, or, in the further alternative, costs on an elevated scale."
Contemptuous damages are trifling amounts awarded to a plaintiff when a court decides that no real loss has been suffered or any actual loss has been caused by the plaintiff's own conduct. Contemptuous damages are widely viewed as a legal slap on the wrist to a plaintiff.
However the libel lawsuit plays out, the actual legal costs are not likely to be a trifling amount. With the statement of defence now filed by Mr. Sutherland, the legal meter is clearly ticking on both sides of the dispute. Imagis will be releasing its third-quarter results soon, which might provide investors with at least some idea of just how much money the struggling company may have available to cover the legal fare being rung up by Mr. Shapray.
Meanwhile Imagis's share price is ticking along far below the 52-week high of $5.66 notched in frenzied trading in the wake of the March 6 Pembridge announcement. With 52,600 shares changing hands on the TSX, Imagis closed at $1.65 on Oct. 24.
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; July 3, 12 and 18; Sept. 12, 13, 16, 20, 23, 24 and 27; and Oct. 2, 9, 11, 16, 21 and 22, 2002.)
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