Shareholders’ Anger Is Compressed Into Suit
Stac Electronics is a Carlsbad, Calif., software company with a clever product called Stacker that, by compressing data two for one, lets you stuff twice as much of it onto the hard drive in your personal computer.
Stacker is well-known. Less well known is the company’s ability to compress the value of your investment. If you bought Stac when it went public less than a year ago, you paid $12 a share. If you still have it, it’s worth about $3. That’s a compression ratio of 4 to 1. Amazing.
The secret of Stac’s data-compression technology is an algorithm, which is kind of like a formula. The secret of Stac’s investment-compression technology is almost as complicated, especially now that the lawyers are involved.
In a shareholder class-action suit, Stac and four of its top executives are being accused of misleading investors in connection with the company’s initial public offering last May, which raised $42 million--half of it for pre-existing shareholders who sold part of their stake.
The question, as they used to say in the days of Watergate, is: What did Stac know and when did it know it?
Two things are known for sure. First, the latest version of the standard operating system used in IBM-compatible personal computers, Microsoft’s DOS 6.0, has a disk-doubling data-compression system already built in, along with some other handy features, all at a pretty low price. Since data compression is practically Stac’s only business, DOS 6.0 is quite a threat.
The second thing known for sure is that before the offering, Microsoft talked to Stac about obtaining the right to use Stac’s technology. In fact, Stac says in a legal brief, Microsoft “made it clear during the negotiations that Microsoft was considering including data-compression capability in future versions of the MS-DOS operating system, and that if it were unable to reach an agreement with Stac, it would obtain this capability elsewhere.”
This is OK, except it might lead uncharitable readers to wonder just how uncertain Stac was about whether Microsoft would indeed release a new version of its ubiquitous operating system with a feature that threatened to make hamburger of Stac’s cash cow.
Stac’s president, Gary W. Clow, who made more than $2 million by selling some of his own stock at the May offering, declined to be interviewed about all this. There’s no question, though, that he knew months before his company went public that Microsoft was considering putting data compression into DOS 6.0. Stac said as much in its complaint in federal court in Los Angeles, where it sued Microsoft for patent infringement after the deal never happened.
Microsoft did more than deny infringing on Stac’s patent. It countersued for conspiracy to commit fraud, among other things, asserting that Stac had “no intention of dealing with Microsoft, but rather ‘negotiated’ for months to delay Microsoft’s release of MS-DOS with integrated data compression” until the public offering was done.
Stac denies all this. Steven Schatz, an attorney representing Stac in the shareholder action, says the company didn’t know of Microsoft’s plans and gave investors adequate warning of the risks in its prospectus.
“There can be no assurance that Microsoft or personal computer manufacturers will not incorporate a competitive data-compression technology in their products,” it says on Pages 5 and 24.
The prospectus also gives other warnings about competition, Stac’s plans to license its core technology to others and its dependence on Stacker for (at the time) 90% of its revenue.
But the prospectus doesn’t say: “Microsoft told us if we don’t sell it the right to our technology, it will use somebody else’s, potentially decimating our business by putting data compression into an operating system that will be included with new PCs and sold to owners of pre-existing ones, maybe for less than 50 bucks.”
Such a statement, whatever its effect on the initial sale of Stac shares, might have averted the shareholder suit Stac and its top executives are now defending themselves against. Aggrieved shareholders (the ones who lost on the offering; current shareholders may become aggrieved if their company has to pay off the old ones) are represented by William S. Lerach of Milberg Weiss Bershad Specthrie & Lerach, based in San Diego. The suit is thus likely to prove costly. Lerach once told an interviewer that he “achieves a significant settlement” in 90% of the suits he files.
