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.