Heat is turned up on StockerYale

Investors suing StockerYale Inc. say that they can produce a witness who will testify that executives distributed a misleading press release, even after being warned that it might be inaccurate.

As a result of the April 2004 press release, the suit says, the company’s stock price shot up, enabling two top executives – CEO Mark Blodgett and his father Lawrence Blodgett, who sits on the board of directors – to make a killing. Then, as the news came out, the price plummeted, causing investors to lose out on thousands of dollars.

Salem-based StockerYale settled in May 2005 with the Securities and Exchange Commission over the charges. In the settlement, the Blodgetts agreed to pay approximately $900,000 over the matter.

But lawsuits soon followed, essentially restating much of the facts contained in the earlier SEC complaint. They were consolidated in U.S. District Court in Concord by the beginning of October. The latest amended complaint, filed Nov. 7, goes into considerably more detail.

The press release in question was issued on April 19, 2004, when the Salem fiberoptics company said it received a Department of Homeland Security order from BAE Systems to deliver a customized laser to be used in a system designed to protect commercial jetliners.

After the press release was published, the company’s stock shot up, rising from $1.45 on April 19 to a high of $7.75 the next morning – a 430 percent increase.

On that day, April 20, CEO Blodgett sold a quarter-million shares at $6.56 share – a trade valued at more than $1.6 million. It was his only stock sale in at least two years. Lawrence Blodgett sold nearly 57,000 shares that day, some valued at $7.19 a share, for a total of more than $350,000.

The problem was that the press release wasn’t exactly true. The orders were not new, but part of an existing contract signed in 2002, and it wasn’t part of a Homeland Security contract. Indeed, the suit states, BAE landed the Homeland Security contract a month after it ordered the lasers from StockerYale. Besides, any such press releases should have been cleared with BAE.

BAE complains

A StockerYale employee based in Montreal had warned that the release might not be true in a half-hour conference call at the company’s Salem headquarters the day of the release, according to the suit.

Luc Many, senior vice president for sales and marketing, advised James Gargas, vice president of corporate marketing, the person who prepared the release, that it was a bad idea. Many said it was old news, the statement about it being part of a Homeland Security contract may not be accurate and should be approved by BAE before being sent out, according to a confidential witness who was present during the entire call, the shareholder lawsuit filing says.

Mark Blodgett called Ricardo Diaz, chief operating officer, who was taking part in the conference call, about the press release while participants were discussing the release’s propriety, according to the suit.

While Gargas agreed to draft a new release and recirculate it for approval, it was issued without discussing it with persons involved in the conference call, the lawsuit filing states.

The stock price soared the next day, but then plummeted after the CNBC financial news channel reported that the contract wasn’t new after all.

The suit alleges that after BAE called to complain about the first release, StockerYale issued a second release that was still only partially true. While the second release did say that the order was old, there were still inaccuracies because BAE’s order did not relate to the long-standing military contract in question.

According to the witness, BAE complained “irately” to StockerYale about the releases and insisted that they should be pulled, which they were. But there really wasn’t any accounting, until the SEC settlement, leaving investors to “twist in the wind.”

Coming to a head

The company seems to be interested in settling the matter. It filed a motion on Nov. 15 for an extension in order to continue settlement talks.

The class action could not come at worst time for the company, which seems to be at somewhat of a crossroads, according to its unaudited quarterly statement filed Nov. 14.

In the filing, the company repeatedly warns that it will be unable to continue to operate if it isn’t able to restructure its debt, sell off some real estate or sell off more stock. The company says it hopes to do one of the three by the end of this year.

These warnings are not new. A 2004 audit warned the company would not be able to continue as a going concern unless it started making money.

But under this filing things seem to be coming to a head.

And while StockerYale slowly increases sales, it continues to lose about $2 million a quarter. At the end of the quarter – which ended Sept. 30 – it had only $1.89 million in cash or cash equivalents left.

It has been able to put off some of the debt due in September, but it owes one lender (Eureka Interactive Fund) $1.5 million by the end of the year and another $375,000 to Laurus Master Fund Ltd., not to mention other debt owed to a Canadian bank.

Furthermore, the company has not been able to sell a facility in Salem, and now thinks it will receive less than the $600,000 it originally expected.

Attorneys in the lawsuit think that the company will be able to reimburse shareholders, noting that StockerYale has liability insurance.

“Our goal is not to hurt the company,” said Laurence Rosen, lead attorney on the case. “But it is not to give management a free pass either.”