Can You Trust Entrust?

Can You Trust Entrust?
L. Taylor - August 1, 2000

Event Summary

Entrust Technologies, Inc., headquartered in Plano, Texas with offices in Canada, the United Kingdom, Japan, Switzerland, and Germany is the subject of a class action lawsuit filed by Kirby McInerney & Squire, LLP representing all purchasers of Entrust securities between April 19, 2000 and July 3, 2000. Ironically, Entrust is an information security vendor that specializes in the kinds of products other businesses use to secure their applications and networks.

On July 11, Entrust suffered a prior blow when the law firm of Bernstein Liebhard & Lifshitz, LLP filed a separate class-action lawsuit for the same date, charging violations of the Securities Exchange Act of 1934. The defendants named in the case are three of the company's officers: John A. Ryan (President and CEO), David L. Thompson (Chief Financial Officer), and Brian O. Higgins (Chief Technology Officer).

The two law firms are hoping to prove that Entrust was motivated to inflate the price of its stock in order to complete the $703 million stock-for-stock acquisition of enCommerce. Two days after the close of the enCommerce acquisition, on July 5, 2000, the officers revealed that Entrust was experiencing rapidly declining revenues, would not meet its earnings projections and was experiencing significant problems in growing its business. In response to the unprecedented disclosures, the price of Entrust stock plunged, plunging more than $40 per share to as low as $34-3/8.

Market Impact

Alleging that Entrust securities traded at artificially inflated prices, the lawsuit hopes to prove that Entrust did not publicly disclose that revenue was coming in at a much slower rate than analysts, and the general public, were led to believe. Entrust stock plummeted from $81.68 on July 5 to $36.63 two days later.

Figure 1. Entrust bottoms out after officers disclose unprecedented projections.

Entrust designs and develops information encryption products based on what is known as Public Key Infrastructure (PKI). PKI is a burgeoning market, and Entrust is one of many vendors that hope to cash-in on the numerous Internet security compromises and break-ins that are growing at an explosive rate.

User Recommendations

Both Kirby McInerney & Squire, LLP and Bernstein Liebhard & Lifshits, LLP specialize in complex litigation, and have in the past have recovered hundreds of millions of dollars in similar class-action lawsuits. Responding to these lawsuits president and CEO John Ryan noted, "Our second-quarter results were affected by delays in closing PKI system extension sales. The issue here is simply revenue timing, not lost business."

Entrust's product suite is sound from a technical standpoint. However, it is going to be hard for them to regain the trust of market analysts due to their newly tarnished reputation.

Until Entrust is better able to project its PKI revenues, potential investors should scrutinize Entrust SEC filings and relevant market information with a fine-toothed comb.

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