Turmoil grips Pay by Touch start-up
The start-up Pay by Touch seemed close to a sure thing, with its futuristic approach to speeding shoppers through checkout lines while protecting their identities.
The company raked in more than $300 million from hedge funds, venture capitalists and wealthy individuals including L.A. billionaire Ron Burkle.
But five years down the road, San Francisco-based Pay by Touch is teetering on the brink of bankruptcy as it prepares to install fingerprint scanners at major retailers.
The company’s 600 employees have been getting paid intermittently for months, according to a court-appointed custodian put in charge of Pay by Touch last month. And four employees filed papers to push Pay by Touch into insolvency.
The Pay by Touch saga is a cautionary tale about what can happen when investors allow an entrepreneur to have too much control, experts said. It also raises questions about whether some East Coast hedge funds learned the lessons from the dot-com bubble about the importance of background checks.
“Hedge funds today need to learn about risk assessment, due diligence and character assessment,” said Kirk Hanson, executive director of the Markkula Center for Applied Ethics at Santa Clara University.
Two lawsuits by former employees depict Chief Executive John Patrick Rogers, 41, as a foul-mouthed bully and cocaine user who ogled female underlings and disappeared for days at a time.
One of them filed against the company and Rogers contends that the CEO’s history of conflicts with women and a serious misdemeanor should have served as red flags. Bernadette Robertson, the former vice president of human resources, said in another suit filed in June against the company and Rogers that she was fired in retaliation for investigating sexual harassment complaints about the CEO. She was replaced, the suit said, by Rogers’ mother.
In an interview this week, Rogers denied the major allegations in the lawsuits, referring to the claims as “character assassination.” He vowed to fight for control of the company, possibly by bringing in new investors. One of Pay by Touch’s investors has filed a third lawsuit, which seeks to wrest control of the company from Rogers.
Pay by Touch’s origins date to the 1990s, when a group of inventors and entrepreneurs were developing fingerprint technology. Users could place their fingers on small optical scanners and have them compared electronically with prints that they had previously submitted, along with driver’s licenses and other documents proving their identity.
When the original backers became divided, Rogers raised money and stepped in to buy the fledgling outfit. He saw that the system would be ideal for supermarkets that prefer verified checks to credit cards, which charge fees on transactions.
Rogers had recently arrived from Minnesota, where he had managed health clubs and carried on stormy relationships with women, two of whom sought restraining orders to keep him away, according to court documents. The two women said they were intimidated by Rogers and that he had threatened them, the court records show.
In 1998, he destroyed much of a house that he had shared with one of those women. Charged with a felony, Rogers agreed to pay $35,000 in restitution and pleaded guilty to a gross misdemeanor, court records show.
Capitalizing on widespread interest after the Sept. 11 terrorist attacks in the field known as biometrics in which individuals can be identified by their unique characteristics such as DNA or their irises, Rogers attracted investors and then executives with more technology experience.
As the main scanning system ran into glitches that delayed widespread deployment, Pay by Touch diversified by buying a surprising variety of other businesses.
Pay by Touch won control of Virginia-based BioPay, which distributed equipment using fingerprint recognition to authorize check cashing; CardSystems Solutions Inc., one of the major processors for payments by credit cards; and the 110-year-old company behind S&H; Green Stamps, now known as S&H; Green Points. S&H; contributed a second key product line to join the electronic-check cashing systems at checkout: machines that spit out personalized coupons to shoppers when they enter a store and swipe loyalty cards or give their fingerprints.
But Rogers’ strategy was akin to betting a chip on each roulette wheel number, another former executive said in an interview. Although Pay by Touch was bound to win sometimes, its finances suffered because it had placed too many bets. Like others interviewed for this story, the executive asked not to be named for fear of triggering more litigation.
Rogers also hired friends and relatives and handled himself inappropriately with subordinates, according to the suit filed by personnel executive Robertson and another suit filed in September by former executive vice president and investor John Siegal, which accuses Pay by Touch of securities fraud for failing to disclose Rogers’ past.
Rogers’ supporters and detractors alike describe him as singularly focused on keeping control of the company he started. Intact after five rounds of raising money, Rogers’ control hinges on a chunk of stock with super-voting rights that he pledged as collateral for a $50-million loan from one of Pay by Touch’s major backers, Greenwich, Conn.-based hedge fund manager Plainfield Asset Management, the court records show.
As the company’s finances deteriorated this year, Plainfield and other backers began to force the issue of control. But when directors asked Rogers to step aside, he repeatedly responded with “some combination of shouting, profanity and threats,” a former director said.
Plainfield sued Pay by Touch in October to try to collect the shares that were pledged as collateral and take control of the company, saying the loan was in default. The suit is in Delaware, where Pay by Touch was incorporated under the formal name Solidus Networks Inc. Rogers is fighting that case and has fired company directors who thought Plainfield had a point, turning the boardroom into a battlefield and causing turmoil in the top management ranks.
Some investors also see Rogers’ hand in the subsequent involuntary bankruptcy filing against Pay by Touch, which could freeze the Plainfield suit and keep him in charge. Two investors questioned the validity of the filing in November, claiming that it was made by employees who included Rogers’ brother-in-law, records in Los Angeles bankruptcy court show. Rogers would not comment on the claim.
Trying to sort through the mess is a court-appointed custodian who last month moved into Pay by Touch’s 11th-floor offices in San Francisco’s tech-centric South of Market district. After securing $9 million in emergency funding, custodian Todd Lumsden said he laid off 45 staffers last week and gave the rest of the employees what was for some their first paychecks in weeks.
The good news is that Pay by Touch has products that are worth something and millions of consumers who use one service or another. That’s one reason the various parties are fighting to salvage what’s left of the firm.
Burkle could play a role, taking advantage of the chaos to turn his investment of less than $5 million into a larger stake in the company. “There may be an opportunity to get involved in the future,” Burkle spokesman Frank Quintero said.
Lumsden, the court-appointed overseer, agreed that revenue from the company’s key product lines was “minimal” for the amount of money invested to date. Current and former employees estimated that total sales are $5 million to $10 million a month, with monthly losses of about the same amount.
A Plainfield partner declined to comment on the wisdom of its investment, as did an earlier venture investor, Mobius Venture Capital. Rogers said he hoped to settle the Delaware action within days by assigning his voting rights to parties independent of both his side and Plainfield. He said he is seeking new investors. So is Lumsden, the court-appointed custodian.
“There’s a real company under all of this,” Lumsden said.
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