Comparator Court Case Grows

The legal net cast over Comparator Systems Corp. started to snare others Thursday as an Orange County judge froze certain assets of a San Diego brokerage firm and any undistributed profits that its customers made from Comparator stock.

Superior Court Judge John C. Woolley took the strong action of ordering the temporary freeze on all profits and commissions made by La Jolla Capital Corp. on Comparator stock trading during a six-day period. The order remains in effect until a June 24 hearing.

Woolley also ordered the brokerage to halt any further payouts of profits that customers made on Comparator stock, including profits that may have been used to buy stock in other companies. The order also requires the brokerage to make sure its clearing agent, Emmitt A. Larkin Co. in San Francisco, doesn’t disburse any of the profits to customers.

In addition, the judge froze the assets of Newport Beach-based Comparator and its chief executive, Richard Reed Rogers. But Wooley refused to impose such an order against Richard E. Floegel, hired only last year as the company’s president, because the investors could not show sufficient reason.

“We got basically what we came for at this juncture,” said Stephen Basser, one of the lawyers for shareholders who sued the fingerprint-technology company May 13 after the meteoric rise and precipitous fall of its penny stock over a few days early in May.

La Jolla Capital acknowledged in court that it took in only $700,000 in profits and commissions for all its trading in Comparator stock in May, raising doubt among plaintiffs. “We’d be interested in seeing a full accounting, especially in light of statements by one of the brokers who said he made $600,000 in commissions,” Basser said.

La Jolla Capital acquiesced to Woolley’s freeze order against its profits and commissions on Comparator, but it fought to exclude the customers from the order.

“I’m not even sure the judge has jurisdiction over them,” said Robert C. Weaver Jr., the brokerage’s lawyer and a principal in the company. “They weren’t in court. He just said, ‘I’m going to make my order.’ We can’t do anything about it.”

The brokerage will notify Larkin about the order, Weaver said, “but we can’t force Larkin to do something.”

The shareholder lawsuit asserts that investors lost $300 million in the trading frenzy because of “false statements and manipulations” by the brokerage and Newport Beach-based Comparator, which makes fingerprint identification devices. The company later was forced by regulators to reveal that it might have overstated the value of 77% of its assets.

In addition, the Securities and Exchange Commission, which halted trading in the stock May 14, filed a sweeping civil lawsuit last week against Comparator and three officers, including its chief executive, Rogers.

The SEC suit accuses the company of lying about its finances, stealing its key product from a professor in Scotland and bilking investors for years by selling stock that was essentially worthless. As part of that suit, a federal judge froze the assets of Comparator, Rogers and the other defendants. The company and its executives have denied any wrongdoing.

Woolley’s order mirrored the federal order in freezing the assets of Comparator and Rogers. But Woolley went a step further to block La Jolla Capital, also a defendant in the lawsuit, from taking any profits pending the outcome of litigation. The brokerage has denied any wrongdoing.

Some of the most serious charges in the suit are against the brokerage. Investors assert that La Jolla Capital “fueled the trading frenzy” by falsely suggesting to potential investors that Comparator’s device would be adopted and purchased by MasterCard, which said last month that it had no plans to use Comparator’s device.

La Jolla Capital said it traded 25.6 million shares of Comparator stock in May, mostly from May 3 to May 8, when the company’s penny stock set three daily trading records on the Nasdaq market and soared thirtyfold in value.

Altogether, about 450 million shares were traded just from May 6 to May 8, according to the shareholder lawsuit. Comparator has a strikingly high 610 million shares outstanding, partly as a result of paying employees and outside consultants in stock instead of cash.

After the SEC’s trading halt expired last week, the National Assn. of Securities Dealers, which oversees the Nasdaq market, instituted an indefinite trading ban while investigating the company.