Software Maker, Insiders Accused of Investor Fraud

Rainbow Technologies Inc. and eight company insiders were named in a shareholder lawsuit alleging the computer software security company defrauded investors.

The suit, filed by a shareholder in U.S. District Court in Los Angeles, seeks class action status for all investors who bought Rainbow stock between March 23 and Oct. 4, 1993.

It alleges that the company was “unqualifiedly optimistic about its future prospects” even though Rainbow insiders knew that weakness was developing in the company’s computer software security products business.

Meanwhile, the insiders allegedly sold 134,800 shares of stock for more than $3.2 million, thus “pocketing huge profits while benefiting from the artificial inflation of Rainbow’s stock price,” according to the lawsuit.

Rainbow’s stock price collapsed on Oct. 11, dropping $5 to $20.50 after the company announced third-quarter earnings would be lower than last year. The company’s stock was up 25 cents Tuesday, closing at $18.50, on 152,900 shares, compared with average daily volume of 100,000 shares.

Rainbow officials, in the statement, denied any wrongdoing, saying that the company intends to fight the charges leveled against it.

Named as individual defendants are Walter Straub, Rainbow’s chairman, chief executive officer and president; Patrick Fevery, chief financial officer; Norman Denton III, vice president of sales and marketing; Richard Burris, vice president of manufacturing; Alan Jennings, director; Marvin Hoffman, director; and Alan Weingartner, former executive vice president, corporate development.

The suit alleges that Weingartner’s resignation from the company on July 23 was “at least in part” because of slowing sales growth in Europe and problems with the acquisition of European competitor Microphar. It claims he was responsible for Rainbow’s European operations, and had “largely arranged” the Microphar merger.

At the time of his departure, Rainbow attributed Weingartner’s resignation to his decision to pursue a new business venture.

Shareholder Charles Gruver is plaintiff in the lawsuit filed Dec. 21 by attorney William Lerach of the San Diego office of Milberg Weiss Bershad Hynes & Lerach.

Company spokeswoman Ann Jones said Rainbow believes the suit’s claims are unfounded, and intends to vigorously defend against the action.

Weingartner wasn’t immediately available for comment.