Comparator Trading Stops Amid Inquiry

Trading in shares of controversial Comparator Systems Corp. was halted for the day Thursday as the company met with stock market officials investigating what caused a lowly penny stock to rise more than thirtyfold in price and set three trading records over the past week.

Investigators from the National Assn. of Securities Dealers, which regulates the Nasdaq market, spent the afternoon at Comparator’s offices watching a demonstration of the company’s new fingerprint identification system. Comparator executives have claimed the surge in trading was prompted by the pending release of the new device at an Atlanta trade show next week.

The demonstration took place behind a barricade of 6-foot-tall crates and boxes that Comparator employees had erected to shield the meeting from a half-dozen reporters gathered in the company’s lobby.

The two investigators--one of whom was believed to be a consultant hired for her expertise in fingerprint identification technology--left without commenting.

Comparator executives also declined to comment on the nature of the inquiry, except to say they are cooperating and waiting for the tidal wave of media and regulatory attention to pass.

“I’m not hiding under my desk, I’m just gritting my teeth,” said Chief Executive Robert Rogers. “We want to get on with our lives.”

Sources said Nasdaq has mounted a broad investigation, probing whether Comparator has the financial wherewithal to market its new product, whether the product has undergone any testing and whether the company can prove it has certain assets it claims on its balance sheet.

Comparator has used its own stock pay for a number of companies it has purchased in recent years, companies now listed as assets on Comparator’s balance sheet. Investigators are examining whether those acquired companies are worth what Comparator claims, sources said.

The trading halt is expected to be in effect until Comparator produces a news release addressing these areas of concern to NASD’s satisfaction, a regulatory source said.

“NASD has to have a comfort level that they’re making disclosures that investors need,” the source said. Trading could resume as early as today, the source said.

One source said that the Securities and Exchange Commission has launched its own investigation of Comparator, which has never turned a profit in its 17 years as a public company but nevertheless had a market capitalization of more than $500 million at certain points this week. SEC officials declined to comment.

The investigations of Comparator were triggered by unprecedented trading in the company’s stock since Thursday. By Tuesday, more than 449 million Comparator shares had changed hands, and three daily Nasdaq trading records had been set. Meanwhile, the company’s stock price had soared from 6 cents to as high as $1.87 per share before closing at 56 cents on Wednesday.

Many called the activity bizarre, given that Comparator was virtually unknown in the fingerprint technology industry. Fingerprint systems have long been used in law enforcement, but the technology is expected to play a growing role in commerce. Credit card companies, for instance, have said they may soon be using fingerprints to verify identities of cardholders when they make purchases at stores and restaurants.

Comparator has had a fingerprint identification product since the early 1980s, but Comparator executives can point to only a handful of small sales to law enforcement agencies. Executives also acknowledge they have made no advanced sales of their new product.

The company, which has 29 employees, reported a loss of $1.85 million on sales of $90,161 for the last fiscal year.

NASD is also said to be investigating a number of questionable claims Comparator has made throughout its history.

In 1990, for instance, Comparator announced it had formed a joint venture with a company partially owned by Budget Rent-A-Car Corp. that was to provide $5 million to $10 million for product development. Days later, executives acknowledged that there was no such financing and that the venture was actually with a company owned by a Budget licensee, not the parent company.

Investigators have also approached many of the brokerage firms that trade Comparator stock, including La Jolla Capital Financial Corp. in San Diego. The firm, which sold millions of Comparator shares this week, has faced a number of disciplinary actions from NASD in recent years, including fines and complaints alleging improper trading activity.

Robin Rushing, a trader at La Jolla Capital, said NASD officials visited the office Thursday morning.

“It’s nice that our clients made money [on Comparator trading this week], but now we’re taking heat for it,” Rushing said.