GAO Points Finger for Comparator Fiasco
The investigative arm of Congress rebuked the Securities and Exchange Commission and the Nasdaq stock market for letting controversial Comparator Systems Corp. sell its risky penny stock publicly.
The General Accounting Office said that Nasdaq failed to check Comparator adequately before listing the company’s stock in 1990 and that the SEC knew about Nasdaq’s listing problems in 1986, but waited 11 years to take action.
Comparator, a Newport Beach maker of fingerprint identification systems, was the target of an SEC investigation after its stock zoomed from pennies a share to $1.87 in three record days of Nasdaq trading in 1996. It crashed as abruptly, leaving investors with $2.9 million in losses.
In a lawsuit, the SEC accused the company of lying about its assets, but the agency closed its probe that September without levying fines or major penalties.
The company’s former chief executive, Robert Reed Rogers, and its former vice president, Gregory Armijo, were barred from ever serving as officers or directors of a public company.
Comparator lost money for nearly 20 years but survived by issuing millions of shares of stock. A year ago, it was evicted from its offices.
Nasdaq dropped Comparator in June 1996, and the stock now trades only in the limited “pink sheets” market. It is not listed on any formal exchange, and last traded at half a penny on Jan. 30.
Comparator’s executives did not respond to a request for comment.
In its report, the GAO found that Nasdaq, which is run by the National Assn. of Securities Dealers, failed to investigate Comparator’s assets adequately while letting the company list its shares on the market.
Comparator’s 1993-95 financial statements showed that an independent auditor had doubts about whether the company could continue as a “going concern,” the report said.
The SEC, which oversees the NASD, was lax in waiting 11 years to follow up on problems discovered with Nasdaq’s listing program, the GAO said. Many of the original deficiencies, including Nasdaq’s failure to spend enough money on listing reviews, persisted from 1986 through 1997, the 33-page GAO report said.
“Follow-up actions are essential to ensure that operating deficiencies are corrected properly and in a timely manner,” the report said.
Rep. John Dingell, a Michigan Democrat who requested the accounting office study, called the report “damning.”
Dingell endorsed the GAO’s proposal that SEC commissioners periodically review all recommendations from the agency’s inspections office. The commissioners also should examine Nasdaq’s listing information on companies that are exempt from market requirements, the report said.
Both Nasdaq, the nation’s second largest stock market, and the SEC have since beefed up their resources and increased monitoring of listed companies, the GAO said.
The NASD stiffened its listing requirements last year, increased the size of its listing staff, and formed a special investigative unit to look at high-risk companies.
The SEC created a special inspections office in 1995, increased the resources devoted to monitoring Nasdaq’s implementation of these standards, and shortened inspection cycles, the GAO said. All the national markets now are inspected every other year, and the regional markets every three years.
