Firm inhabits twilight zone
INVESTING: Comparator Systems
is moribund, but its stock still
trades. Why?
March 15, 1998
By LIZ PULLIAM
The Orange County Register
Comparator Systems Corp. is a ghost ship.
The company, which once purported to sell
fingerprint-identification technology, is broke. It has
no product, no employees, almost no money and
virtually no prospects. Its "headquarters" is an
answering machine at an undisclosed location.
Yet every trading day, tens of thousands of
Comparator shares still change hands.
Comparator's chief executive was forced to resign
after the SEC accused the company of inflating its
assets and defrauding investors of $2.9 million.
Comparator admitted that it didn't even own the
technology used to lure investors; Scottish inventors
said one machine was borrowed without permission
and only belatedly returned.
Yet shareholders continue to post queries and rumors
about the company's prospects on Internet bulletin
boards.
Two years ago, Comparator was an object lesson in
Internet hype and investor gullibility, when months of
anonymous touting culminated in a four-day trading
frenzy that pushed the company's stock from 3 cents
a share to nearly $2.
Today, this Flying Dutchman of penny stocks shows
how reluctant regulators can be to shut down trading
of even the hollowest shares.
"Why is this company still trading?" wonders Dick
Towt, whose wife, Kay Churchill, helped bring about
the company's downfall by giving regulators
information gleaned from her years as the company's
secretary. "What's keeping this thing afloat?"
Regulators say they have done all they can to warn
investors about Comparator's problems. The lesson
for the public, they say, is that just because a stock
exists doesn't mean it has any value.
The Comparator debacle prompted the National
Association of Securities Dealers to impose stiffer
listing requirements on its Nasdaq SmallCap
exchange, where Comparator set trading volume
records in May 1996.
Nasdaq also set up a special investigative unit to
monitor suspicious companies and developed an
automated risk-scoring system to identify which
companies to watch.
Comparator now belongs to investing's Wild West,
where stocks are traded informally between brokers.
The company typically trades for about half a cent
per share and is quoted on the OTC Bulletin Board, a
quotation service operated - but not regulated - by
Nasdaq. Nasdaq merely reports trade prices on the
Bulletin Board, but says it has no authority to
discipline the companies involved. About half of the
6,000 to 7,000 companies quoted on the Bulletin
Board don't even bother to file regular financial
reports, said Frank Zarb, NASD chairman.
In December, the NASD proposed new rules for the
Bulletin Board that would prohibit quoting stock
prices of companies that don't disclose their financial
condition and that would force brokers to disclose to
investors the Bulletin Board's lack of listing
requirements.
Investor advocates complain that brokers sometimes
misrepresent Bulletin Board stocks as meeting Nasdaq
listing requirements. Because both are reported on
quotation services, the deception often goes
undiscovered.
So far, the proposals are still in the discussion stage.
Some brokers complain that the measure would
interfere with investors' rights, while the NASD
worries that being too restrictive could hurt small
companies' chances to grow.
"We don't want to cut off small companies' access to
capital," Zarb said.
Comparator hasn't filed a financial statement since
November. In that report, Comparator lists assets of
$36,000 and liabilities of $4.2 million. The report was
delayed because Comparator couldn't find enough
money to pay its auditor, and the company had less
than $2,500 cash as of Sept. 30.
Since then, Comparator has abandoned the Newport
Beach real estate licensing office it had called home
and left no forwarding address. Calls to the
company's answering machine were not returned.
Zarb said it's up to the SEC to stop Comparator from
trading. So far, the SEC hasn't acted, a fact that
mystifies some observers.
A few weeks after Comparator's May 1996 run-up,
the SEC filed a civil-fraud lawsuit alleging that
Comparator had issued false and misleading financial
statements for three consecutive years, that Chief
Executive Robert Reed Rogers had lied to investors
about Comparator's alleged patents, and that the
company was "engaged in no substantial business
activities other than the sale of stock to investors."
The SEC settled the charges in September 1996 with
a consent decree that banned Rogers from working as
an officer or director of a publicly traded company.
The SEC didn't pursue a fine, despite a $2.9 million
loss to investors, saying Comparator had no assets to
claim. The SEC allowed it to start trading again after
Nasdaq delisted the stock in June 1996.
"They (the SEC) could issue a stop order on a
moment's notice," said Steven Gourley, a former SEC
attorney now in private practice. "Why didn't they
make it part of the settlement?"
SEC spokesman John Heine said he could not
comment specifically about Comparator, other than to
note that the SEC's civil suit and its original 10-day
suspension made public the company's problems.
"If people continue to be interested in buying and
selling a stock, that's what constitutes a market,"
Heine said. "We live in a society that has a
free-market system."
Both the SEC and the NASD drew fire last month for
their earlier failures to act. Congress' investigatory
arm, the General Accounting Office, criticized the
NASD for failing to uncover Comparator's deception
earlier and faulted the SEC for waiting 11 years to
look into reported problems with NASD's listing
requirements. The GAO did not address
Comparator's continued trading.
Comparator's trading continues to draw comments
from Internet users, who post rumors that the
company is about to unveil a new product, or make
hopeful queries when the stock price inexplicably
jumps to 1 cent per share before falling back.
The trading activity baffles some investors who got
burned two years ago and who can't understand why
anyone would buy the shares - or why no criminal
action has been taken against those who promoted
Comparator.
"The real tragedy is that the people involved in this
aren't behind bars," said Irvine resident Robert Van
Landingham, 39. "They're still out there and they're
going to do the same thing again."
Van Landingham bought 5,000 shares at $1.50 apiece
after watching the share price climb for three days.
Soon after his purchase, Comparator stock plunged,
hitting 56 cents before trading was halted.
"I just got caught up in the hype," said Van
Landingham, a retired Marine. "That won't happen
again, guaranteed."
Van Landingham said he still invests in individual
stocks but sticks to those listed on the New York
Stock Exchange, which has stiffer requirements than
the Nasdaq exchanges.
A criminal investigation might be under way. Former
Comparator secretary Churchill, who has since
changed her name to Summer Wolf, said the FBI
interviewed her last month about possible stock
manipulation at Comparator. Wolf said the
investigator was interested in meetings between
Comparator officials and brokers at San Diego-based
La Jolla Capital Financial Corp., the chief broker for
Comparator stock in 1996, Wolf said.
La Jolla and its president, B.J. Gallison, have since
been banned from selling low-cost stocks after an
unrelated NASD investigation found sales-practice
abuses at the firm.
Gallison said he has not been contacted by the FBI
and predicted investigators would fail to find criminal
activity. He said he also was not surprised that the
stock continued to trade. That's the nature of the
penny stock market, where investors pin their hopes
on companies while knowing little about them, he
said.
"People continue to buy it without any investigation,"
Gallison said. |
