SEC Suspends Comparator Trades 2 Weeks

The Securities and Exchange Commission took the unusual step Tuesday of suspending trading of Comparator System Corp. stock for two weeks, just as the company unveiled its new fingerprint identification device to a skeptical crowd at an Atlanta trade show.

The SEC action topped a flurry of developments in recent days, including the filing of a shareholder lawsuit alleging that record trading in Comparator shares last week was fueled by false rumors that the company’s new identification device might be used by MasterCard.

The trading suspension also appears to have prompted the National Assn. of Securities Dealers, which regulates the Nasdaq stock market, to reconsider its trading requirements for small company stocks.

NASD President Joseph Hardiman on Tuesday called for a thorough review of the listing requirements in the Small Cap market, where Comparator is traded. Currently, a company needs $2 million in assets and a market capitalization of $1 million to maintain a Small Cap listing when the price of the stock falls below $1 per share.

NASD had halted trading in Comparator last Thursday, but the SEC suspension marks the first action taken by the government against Comparator, and suggests that the controversial Newport Beach company is coming under increasing scrutiny.

The company was compelled by NASD regulators last week to admit that it might have overstated the value of 77% of its corporate assets, and that it doesn’t have the money to bring its new device to market.

But investigators appear to have more questions about the company’s finances, and are continuing to search for evidence of insider trading and market manipulation, sources said.

The investigation centers on what caused a lowly penny stock to set three trading records and soar 30-fold in price over three days that started May 3.

In a news release, the SEC said it imposed the trading suspension because of “questions raised as to the adequacy and accuracy of publicly disseminated information about Comparator.”

Gary Sundick, associate director of the SEC’s enforcement division, said the agency typically imposes fewer than 10 trading suspensions per year, and that the action indicates “that the commission views this matter seriously.”

The SEC suspension, which means Comparator shares cannot resume trading before May 29, came one day after the shareholder lawsuit was filed against Comparator.

The suit contends that investors lost $300 million in last week’s trading frenzy because of “false statements and manipulations.”

“When the truth about Comparator began to be disclosed,” the suit alleges, Comparator’s stock tumbled 70% to close at 56 cents a share last Wednesday, when trading was halted by NASD.

Some of the more serious allegations in the suit are directed at La Jolla Capital Corp., a San Diego-based brokerage that traded millions of Comparator shares during last week’s heavy activity.

The suit alleges that La Jolla “fueled the trading frenzy” by falsely suggesting to potential investors that Comparator’s system would be adopted and purchased by MasterCard. Last week, MasterCard said it had no plans to use the Comparator system.

La Jolla Capital profited from this alleged scheme, the suit contends, because the firm owned and traded about 50 million shares of Comparator stock when the price was soaring. La Jolla manipulated Comparator stock, according to the suit, “by artificially creating the impression of active trading.”

Executives at Comparator and La Jolla Capital were unavailable for comment.

The plaintiffs identified in the suit, which was filed Monday in Orange County Superior Court, include five investors who claim to have bought Comparator shares on May 7 at prices ranging from 63 cents to $1.63 per share. These investors are represented by several law firms, including Milberg Weiss Bershad Hynes & Lerach of San Diego.

The legal and regulatory skirmishes unfolded while the company showed its new product--a fingerprint ID system--to the public for the first time at the CardTech SecurTech trade show in Atlanta.

The company says its system can be used to verify identities in a number of areas ranging from law enforcement to credit card purchases. And company executives have said the anticipation of the Atlanta event might have triggered the market surge.

But a number of people who visited the Comparator display Tuesday weren’t overwhelmed.

Jeff Stringer, a systems integrator from Pittsburgh, said Comparator’s device didn’t seem all that different from others on display at the show, but that he couldn’t be sure because Comparator officials wouldn’t let him try the system out.

“The people at Identicator [a rival of Comparator] let me put my finger in and twist it around different ways to see how it reads,” Stringer said. “That’s a good way to judge a system.”

Chris Bussey, who was shopping for a security system for chemical company Huls America Inc., said Competitor’s device “appears to have certain advantages.” The company says its device is more accurate than rivals’ products. But Bussey also questioned a number of claims made by Comparator’s salespeople.

While other companies told him extreme cold or heat could affect fingerprint systems when used outdoors, Comparator said weather would make no difference, according to Bussey. And while other companies told him fingerprint systems cost about the same as more common security card systems, Comparator said its system would cost much less.

“I’m getting radically different answers than I’m getting from the others,” Bussey said.

Comparator’s device is a wooden box, not much larger than a shoe box, with a glass protrusion that scans fingerprints and relays an image of the print to a computer. The system attracted a moderate amount of interest at the CardTech SecurTech trade show, but some of that attention appeared to be fueled by the presence of CNN camera crews and reporters.

Comparator executives acknowledged last week that they are seeking $2.5 million to mass-produce their device, but that they have no advance orders for it. The company has manufactured a similar device since the early 1980s but has had spotty sales. Last year, Comparator reported a loss of $1.85 million on sales of about $90,000.

The 29-employee company has about 610 million shares outstanding, more than such industry giants as Microsoft Corp.

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Miller reported from Orange County and Harrison from Atlanta.