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Abusing DMCA and other frivolous litigation (SunnComm)

I just came across the story of Alex Halderman, the Princeton University grad student, who had discovered that SunnComm’s copy protection, MediaMax CD-3 software, could be easily blocked by pressing the shift key over at Prof Dave Farber’s Interesting People. Attorney and Censorware Project cofounder James S. Tyre posted:

"I'm sure you'll both agree that Alex should be criticized roundly for analyzing only the currently existent technology while utterly failing to laud SunnComm for future improvements that it says it will make.

Amusing tho that was, what really caught my eye was his comments that:

Earlier this week, each of you [Prof Farber & C/Net's Declan McCullagh] had items about Princeton grad student Alex Halderman's report on SunnComm's MediaMax CD3 copy protection technology. Subsequently, SunnComm's stock price has dropped precipitously, and today, SunnComm announced that it will pursue legal action against Halderman

That phrase, “Subsequently, SunnComm's stock price has dropped precipitously" made me curious. So I did a little homework: Having no previous knowledge of SunnComm or its stock, I pulled up a chart of the company's historical stock performance. I also looked up what I could on its website.

I assumed most people were not aware of some of the specifics of SunnComm (self-described as an OTC stock), prior to the Princeton grad student's paper kicking up a stir. SunnComm (STEH) is what’s known as a "penny" stock -- it trades on the pink sheets, which has about as lax reporting requirements as is possible. Indeed, even SunnComm’s own Website has a "we're on the pink sheets" disclaimer.

For nearly all of the prior 3 years, SunnComm traded under 1/4; In fact, it was under a dime for most of that period. See chart at Yahoo Finance or BigCharts (When looking at the 3 year chart on other websites, ignore the temporary spikes from a dime up straight to 90 cents and back. These sort of blips typically reflect trading errors, i.e. 90 cents instead of 9 cents).

I put a much better displayed, 3 year weekly chart from ILX below. Note that in early 1999, the stock hit $2.50, but subsequently slid to about 30 cents later in the year.

But let's look at the recent activity, especially since the announcements about the copy protection were released. Starting in May 2003, the stock zoomed from 10 cents up to 40 cents. (The stock was under a nickel as late as April 24th); The subsequent "precipitous" drop was nothing more than the stock dropping back to its prior trading range -- back under a dime.

double click for bigger chart

Source: ILX

What's so curious about this move in May 2003 is that it occurred in the middle of a long news blackout. That aroused my curiosity, and makes, in my opinion, the activity in this pink sheet stock suspect. So I went back and looked at all the news releases this year. Because there appears that there were no offical news released between April 4th 2003 ("Tattoo Media joins forces with SunnComm Technologies") and June 2, 2003. (Macrovision, SunnComm Race To Protect Music From Pirates) that could explain the stock's thrust upwards.

I did, however, notice that sometime in August, the company announced a 2 Million Share buyback. Why a microcap pink sheet company feels the need to buy back stock, I couldn't possibly tell you.

But if I was advising the Princeton student, I would suggest the first thing he do is have his lawyer find out if any insiders, officers, board members, or major shareholders did any buying during that period.

If any purchases were made in anticipation of material non public information, than who ever did so has much bigger problems than some grad student's paper . . .

double click for bigger chart

Source: ILX

Sources:
Simple Flaw in CD-Copy Protection System?
(LOS ANGELES (Reuters) - A Princeton graduate student said on Monday that he has figured out a way to defeat new software intended to keep music CDs from being copied on a computer -- simply by pressing the Shift-key.)
http://biz.yahoo.com/rb/031007/media_bmg_protection_1.html

Legal Threat: SunnComm Says Princeton Report Contains Erroneous Conclusions
http://biz.yahoo.com/bw/031009/95573_1.html

Princeton student sued over paper on CD copying
http://biz.yahoo.com/rc/031009/media_bmg_protection_1.html

Update 9:22am:
SunnComm is apparently dropping their lawsuit
Threat of lawsuit passes for student
http://www.dailyprincetonian.com/archives/2003/10/10/news/8797.shtml

Thursday, October 09, 2003 | 07:44 PM | Permalink | Comments (5) | TrackBack (2)
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Comments

In 2002,the following question and answer was placed on SunnComms AskThePrez web page.

http://www.sunncomm.com/asktheprez/asktheprez.asp

I am reproducing the exact post below. It is from a copy I made at the time. It differs in three respectsfrom the Q&A currently at the above URL (2nd last question from the end).

1)Because of the way I saved it some formating attributed have been lost

2) The Microsoft person responding is Ken Fagan, instead of Ken Cavallon (this I will get to) and

3) SunnComm subsequently added dates to the Q & As.

Q: You said our relationship with Microsoft is a matter of record.Everyone buying a msft produuct has the same relationship and record. What makes ours different than the millions of current msft buyers.Do we have any revenue producing products currently bringing in revenues. How are we financing our business?We have approximately two weeks until the audit is completed by your words. Is that the time frame that we can go by.Are we in serious negotiations with any potential contraxct customers?Whatever happened to the european deals that were supposed to take place in Dec, Jan Feb Mar etc....Thanks for your answers.

A: Dear Mr. Hall,
I asked Microsoft to email me and tell me what they think of our relationship. Below please find a verbatim reply to your question. Because of its length Ill endeavor to answer your additional questions in subsequent responses.

Thanks for writing,
Peter

BELOW IS THE MICROSOFT REPLY.-----Original Message----- >

From: Ken Fagan (kfagan@microsoft.com)
>Sent: Tuesday, August 20, 2002 10:07 AM
>To: Peter Jacobs
>Subject: The Microsoft and SunnComm Relationship

Dear Peter;
Lately I have been getting inquiries from partners and the marketplace in general as to the quality and depth of the relationship between our companies and I want to take a moment to give some clarification.

SunnComms relationship with Microsoft is multi-faceted. Microsoft is committed to helping you and your people succeed in getting to market with your digital content copy protection technology. To this end we have focused support, people, technology and financial resources specifically on SunnComm. These resources include peopl e throughout the company with the heaviest concentration in our Digital Media Division (DMD).Within the DMD, Christina Calio, Business Development Manager, is specifically goaled on go to market strategies with partners including SunnComm. John Paddleford, Lead Program Manager heads a team that has been focused on creating technologies and extending the Windows Digital Media Platform for SunnComm, enabling you to create a more tightly integrated solution with our Digital Rights Management technologies. It is our hope that we have proven our commitment to you as a partner.

Additionally, we have marketing and PR people (Jennifer Baisch and Erin Cullen respectively) goaled on helping to partner better with SunnComm. Christina Calio has committed Business Investment Funds (BIF) to help you with your go to market strategies on multiple fronts. The efforts that the Digital Media Division are putting forth on your behalf go to the highest ranks within the group and are clearly on the radar of the divisions Corporate Vice President, Will Poole. You met Will on your recent trip to Washington DC when you each provided testimony in front of the House of Representatives.

SunnComm is one of a very limited number of partners admitted to the JDP for our next generation of Windows Media Player codenamed "Corona". We think SunnComm is uniquely qualified so we have been happy to provide you with the earliest releases of the new player, development documentation and technical development assistance. Also, we are looking forward to your unique development of a "Secure Burn Plug-In" using your MediaMaker technology for the new player. This is a solution that we believe the marketplace will respond favorably to and will be truly the first of its kind.Thank you for your efforts in furthering the Windo ws Media Platform, we here at Microsoft are excited about SunnComms recent breakthroughs and are looking forward to an excellent fall launch of each of our respective digital media solutions.

If you receive any additional inquiries as to the nature of our relationship, please feel free to send them my way and I will ensure that they are connected with the appropriate people within our company.Ken Fagan Engagement Manager Microsoft Services for ISV Partners*
kfagan@microsoft.com
(Direct: 425.704.5240
Fax: 425.936.7329
Microsoft Corporation
One Microsoft Way
SAM-D/5526
Redmond, WA 98052-6399

What was most striking about this e-mail from Microsoft is that companies simply do not write such public tributes to each other. It was immediately suspicious from that respect. Then someone recalled the name Ken Fagan. It turned out that this Mr Fagan had a private contract with SunnComm, the terms of which was in their SEC filing, later withdrawn.

On August 18, 2000, we entered into a Consulting Agreement with Kenneth W. Fagan, whereby Mr. Fagan agreed to act as Special Advisor to the board ofdirectors and a corporate consultant. The term of the agreement is one (1)year. We paid Mr. Fagan an initial payment of $2,500 upon the execution of the agreement. We also agreed to pay Mr. Fagan $2,000 per month during the term,along with 250,000 restricted shares of the Company's common stock upon theexecution of the agreement. Mr. Fagan has a right to earn up to 750,000 options at an exercise price of .22as follows: 34% to be issued upon the signing ofthree (3) licensing agreements with major software vendors ($25,000000 + inrevenues) delivered by Mr. Fagan, and 66% to be issued upon the signing of alicensing agreement with a large independent software vendor (such as Oracle,Microsoft, etc.) delivered by Mr. Fagan. See Exhibit 10.17 for a copy of theConsulting Agreement.

http://www.secinfo.com/d1157k.43b.htm

Further details of the contract are in the exhibit at that link.Considering that contract required him to sign a license agreement with Microsoft,of which he was an employee at the time, that was an obvious conflict of interest.

What's more. Fagan had been writing messages on SunnComm'sboard on Raging Bull, urging people to buy the stock of SunnComm (without disclosing his relationship to that company).

This is an example, but unfortunately the link doesn't work anymore:

BUY BUY BUY!!! This could be a $30B Company (that's right, a B!) in a matter of months!!!

http://ragingbull.lycos.com/mboard/boards.cgi?board=SUNX&read=533

Someone wrote on the Raging Bull board that they were going to inform the SEC about this and also Microsoft. A poster wrote to Ken Fagan at Microsoft asking for an explanation. None was forthcoming, but he mentioned he had a new e-mail address because he had in the meantime changed his name to Ken Cavallon. The reason he gave for doing so is in a post he made on Raging Bull (that actually works):

And yes, I did change my name on August 1st, 2002. Wouldn't you if your name was FAGan and you could? (My kids were sick of getting teased and I was sick of re-living it! So we took my mother's maiden name!)

http://ragingbull.lycos.com/mboard/boards.cgi?board=STEH&read=35524

(Note: his pumping on Raging Bull was under a different ID, but he identified himself as Ken Fagan and an employee of Microsoft).

Although this was reported to Microsoft, I am not aware whether they took any action. However, that note was used to pump SunnComm's stock at the time.

Posted by: Anon Nymous | Oct 12, 2003 8:12:50 PM

SunnComm accused Halderman of wrongdoing for exposing their weak copy protection. "Let he who is without sin cast the first stone". Is SunnComm without sin?

In December 2000, SunnComm announced a $20M deal with Will-Shown, who they described as a major Pacific Rim CD Manufacturer.

SunnComm Inks $20+ Million Copy Protection Deal With Major Pacific Rim CD Manufacturer

http://cdmediaworld.com/hardware/cdrom/news/0012/sunncomm_cd_protect.shtml

People are asking who is the Will-Shown Technology Company. Why would a CD manufacturer license copy protection? It is not a record label. Why would it commit so much to an untested product by a penny stock with no track record? How could a major Pacific Rim CD manufacturer not have a web site? How come it is not even mentioned on the web by anyone else? The stock price tripled in the days after the announcement. Who can find Will-Shown and clear up the mystery? A major Pacific Rim CD Manufacturer couldn't just vanish like that, could it?

SunnComm was previously named Desert Winds Entertainment. The SEC found a little problem with them: http://www.sec.gov/litigation/complaints/complr17462.htm

Paloma appointed Jacobs as president and Jacobs, who accused Halderman of wrong doing, was the person responsible for the Will-Shown press release.

Posted by: ataboy | Oct 17, 2003 11:24:06 AM

Here's the SEC link and Complaint from the previous comment:

http://www.sec.gov/litigation/complaints/complr17462.htm

-----------------------------------------
UNITED STATES DISTRICT COURT
FOR THE DISTRICT OF COLUMBIA

SECURITIES AND EXCHANGE COMMISSION,
450 Fifth St., N.W.
Washington, D.C. 20549
 
Plaintiff,

v.
 
MICHAEL PALOMA
9615 East McKillips Road
Mesa, Arizona 85207
 
MATTHEW BARDASIAN
2325 Rock Hill Circle
Reno, Nevada 89509
 
DESERT WINDS ENTERTAINMENT CORP.
(N/K/A SUNNCOMM, INC.)
668 N. 44th Street Suite 248
Phoenix, Arizona 85008

Defendants.
-----------------------------------------
Complaint for Injunctive and other Relief

Summary

Plaintiff Securities and Exchange Commission (the "Commission") alleges:

1. From at least March 1999 through November 1999, defendants Michael Paloma ("Paloma"), Matthew Bardasian ("Bardasian") and Desert Winds Entertainment Corp. ("Desert Winds") falsely announced in press releases and Commission filings a $25 million contract between Desert Winds and Warner Bros. As they knew, however, no such contract existed. Both Paloma and Bardasian profited from their involvement with the company by offering and selling restricted Desert Winds shares when no registration statement as to the securities was in effect or had been filed with the Commission.

2. By engaging in this conduct, the defendants violated the antifraud and registration provisions of the securities laws, Sections 5(a), 5(c) and 17(a) of the Securities Act of 1933 (the "Securities Act") [15 U.S.C. §§ 77e and 77q(a)] and Section 10(b) of the Securities Exchange Act of 1934 (the "Exchange Act") and Rule 10b-5 thereunder [15 U.S.C. § 78j(b) and 17 C.F.R. § 240.10b-5].

Jurisdiction

3. This Court has jurisdiction over this action pursuant to Section 22(a) of the Securities Act [15 U.S.C. § 77v(a)] and Sections 21(d)(3)(A), 21(e) and 27 of the Exchange Act [15 U.S.C. §§ 78u(d)(3)(A), 78u(e) and 78aa]. Venue lies in this Court pursuant to Section 22(a) of the Securities Act [15 U.S.C. § 77v(a)] and Section 27 of the Exchange Act [15 U.S.C. § 78aa].

4. The Commission brings this action pursuant to authority conferred upon it by Section 20(b) of the Securities Act [15 U.S.C. § 77t(b)] and Section 21(d)(1) of the Exchange Act [15 U.S.C. § 78u(d)(1)].

5. Defendants, directly or indirectly, have made use of the means and instrumentalities of interstate commerce, or of the mails, or of the facilities of a national securities exchange in connection with these acts, practices, and courses of business alleged in the complaint.

Defendants

6. MICHAEL PALOMA is a resident of Mesa, Arizona. Paloma was the President and Chief Executive Officer of Desert Winds from its inception in 1998 until 2000.

7. MATTHEW BARDASIAN is a resident of Reno, Nevada. From 1998 through at least November 1999, Bardasian financed Desert Winds, providing approximately $1.3 million in operating capital.

8. DESERT WINDS is a Nevada corporation whose stock was quoted on the Pink Sheets and traded in the over-the-counter market. From its inception until approximately January 2000, Paloma and Bardasian controlled Desert Winds, which is now named SunnComm, Inc.

First Claim For Relief

[Material Misrepresentations]

Violations of Section 17 (a) of the Securities Act [15 U.S.C. § 77q(a)], Section 10 (b) of the Exchange Act [15 U.S.C. § 78j(b)], and Rule 10b-5 thereunder [17 C.F.R. § 240.10b-5]

9. Paragraphs 1 through 8 are realleged and incorporated by reference.

10. On March 15, 1999, Desert Winds announced in a press release that it had signed a $25 million deal with a "major studio" for the production of 33 episodes of a television series called "News Traveler." On April 14, 1999, Desert Winds announced in another press release that it "will be delivering to a yet-to-be-disclosed major studio . . . the first three episodes of there [sic] new production, News Traveler." On May 7, 1999, Desert Winds announced that Warner Bros. was the major studio that had contracted with Desert Winds for the News Traveler show.

11. On November 12, 1999, Desert Winds filed a Form 10-12G with the Commission (later withdrawn) that also described the contract with Warner Bros. The filing falsely states that "[i]n March 1999, the Company signed an agreement with Warner Brothers Television providing for production of 33 episodes of `News Traveler'." The Form 10-12G also reported that Desert Winds had net assets at year-end 1999 of $19.8 million, entirely attributable to the fake contract.

12. Within two weeks, Desert Winds' Form 10-12G was withdrawn and an amended Form 10-12G was filed with the Commission. The amended Form 10-12G contained the same representations as the previous filing about the Company's purported Warner Bros. contract and net assets. Shortly thereafter, the amended filing also was withdrawn.

13. In fact, Desert Winds had no contract or other agreement with Warner Bros. of any description at any time. Moreover, Desert Winds had no contract or other agreement of any description at any time with any other studio or other source of funding for the development of "News Traveler."

14. Paloma and Bardasian caused Desert Winds to issue each of the press releases and to make each of the Commission filings described in Paragraphs 10-12, above. Paloma, Bardasian and, through Paloma and Bardasian, Desert Winds, knew or were reckless in not knowing that the statements contained in those documents concerning the Company's purported contract with Warner Bros. and its net assets, as described in Paragraphs 10-12, above, were materially false and misleading.

15. Paloma, Bardasian and Desert Winds, in the offer or sale of securities, by the use of means or instrumentalities of interstate commerce or of the mails, directly or indirectly: (a) employed devices, schemes or artifices to defraud; (b) obtained money by means of untrue statements of material facts or omitting to state a material fact necessary to make the statements made, in light of the circumstances under which they were made, not misleading; or (c) engaged in transactions, practices or courses of business which operated or would operate as a fraud or deceit upon the purchaser, in violation of Section 17(a) of the Securities Act [15 U.S.C. § 77q(a)].

16. Paloma, Bardasian and Desert Winds, in connection with the purchase or sale of securities, by the use of means or instrumentalities of interstate commerce or of the mails, directly or indirectly: (a) employed devices, schemes or artifices to defraud; (b) made untrue statements of material facts or omitted to state material facts necessary in order to make the statements made, in the light of the circumstances under which they were made, not misleading; or (c) engaged in acts, practices or courses of business which operated or would operate as a fraud or deceit upon other persons, including purchasers and sellers of such securities, in violation of Section 10(b) of the Exchange Act [15 U.S.C. § 78j(b)] and Rule 10b-5 [17 C.F.R. § 240.10b-5] thereunder.

17. By reason of the foregoing, Paloma, Bardasian and Desert Winds have violated and unless restrained will violate Section 17(a) of the Securities Act and Section 10(b) of the Exchange Act and Rule 10b-5 thereunder.

Second Claim for Relief

[Sale of Unregistered Securities]

Violations of Sections 5(a) and 5(c) of the Securities Act [15 U.S.C. §§ 77e(a), and 77e(c)]

18. Paragraphs 1 through 17 are realleged and incorporated by reference.

19. From January through March 2000 Bardasian, while a "control person" of Desert Winds, as that term is defined for purposes of Commission Rule 144, offered and sold, directly or indirectly, a total of 778,800 restricted shares of Desert Winds common stock, issued to him in March 1999 by the Company.

21. From May through December 2000 Paloma, while a "control person" of Desert Winds, as that term is defined for purposes of Commission Rule 144, offered and sold, directly or indirectly, a total of 2,072,500 restricted shares of Desert Winds common stock, issued to him by the Company on December 31, 1998.

22. No registration statement was ever filed or in effect as to these offerings and sales of securities by Bardasian, Paloma and Desert Winds, and no exemption from registration is applicable.

23. By reason of the foregoing, Paloma, Bardasian and Desert Winds have violated and unless restrained will violate Sections 5(a) and 5(c) of the Securities Act [15 U.S.C. §§ 77e(a) and 77e(c)].

Prayer for Relief

WHEREFORE, the Commission respectfully requests that this Court enter Judgments:

A. Permanently enjoining all defendants, and each of them, and their agents, servants, employees, attorneys, and those persons in active concert or participation with them who receive actual notice by personal service or otherwise, from violating, directly or indirectly, Section 17(a) of the Securities Act [15 U.S.C. § 77q(a)], Section 10(b) of the Exchange Act [15 U.S.C. § 78j(b)], and Rule 10b-5 thereunder [17 C.F.R. § 240.10b-5];

B. Permanently enjoining all defendants, and each of them, and their officers, agents, servants, employees, attorneys, and those persons in active concert or participation with them who receive actual notice by personal service or otherwise, from violating, directly or indirectly, Sections 5(a) and 5(c) of the Securities Act [15 U.S.C. §§ 77e(a) and 77e(c)];

C. Ordering payment of disgorgement and imposing civil monetary penalties on Paloma pursuant to Section 20(d) of the Securities Act [15 U.S.C. § 77t(d)] and Section 21(d)(3) of the Exchange Act [15 U.S.C. § 78u(d)(3)];

D. Permanently prohibiting Paloma and Bardasian, pursuant to Section 20(e) of the Securities Act [15 U.S.C. § 77t(e)] and Section 21(d)(2) of the Exchange Act [15 U.S.C. § 78u(d)(2)], from acting as officers or directors of any issuer that has a class of securities registered pursuant to Section 12 of the Exchange Act [15 U.S.C. § 78l], or that is required to file reports pursuant to Section 15(d) of the Exchange Act [15 U.S.C. § 78o(d)];

E. Granting such other relief as this Court may deem just and proper.

Respectfully submitted,

____________________________________
Charles D. Stodghill (D.C. Bar No. 256792)
Paul R. Berger
Richard C. Sauer
Robert J. Keyes
Jena T. Martin
 
Attorneys for Plaintiff
U.S. Securities and Exchange Commission
Mail Stop 9-11
450 Fifth Street, N.W.
Washington, D.C. 20549-0911
Tel: 202-942-4528 (Stodghill)
Fax: 202-942-4569

Date: April __, 2002

http://www.sec.gov/litigation/complaints/complr17462.htm

Modified: 04/11/2002

Posted by: Barry Ritholtz | Oct 18, 2003 8:09:34 PM

This is intriguing. A couple of entries back in the post about a Microsoft e-mail, there is a link to an sec filing by SunnComm that they withdrew later.

http://www.secinfo.com/d1157k.43b.htm

I've been perusing that and have made an interesting find. They have been deceptive in their statements about having the first copy protected CD in the US. In all their recent press release, you will see this statement (example from most recent PR): "SunnComm’s copy-management technology was commercially released by Music City records in 2001, which became America’s first copy-protected audio CD."

http://www.sunncomm.com/press/pressrelease.asp?prid=200310101150

But this is in that SEC filing:

"On or about April 17, 2001, pursuant to a license agreement between the Company and Fahrenheit Entertainment, Inc. (see "Contracts" below), Music City Records will commercially release the latest CD by country music recording legend Charley Pride incorporating MediaCloQ(tm)."

Then a bit further down ...

"On December 1, 2000, we entered into a one-year license agreement with Fahrenheit Entertainment, Inc., ("Fahrenheit") an independent record label, granting Fahrenheit a royalty-free, nonexclusive, nontransferable worldwide license to incorporate MediaCloQ(tm) into its products. In exchange, Fahrenheit has agreed to act as a technology partner during the term of the agreement. Fahrenheit must ship 25,000 CD units per month. See Exhibit 10.06. On or about April 17, 2001, pursuant to this license and in coordination with Fahrenheit, Music City Records shall commercially release the latest CD by country music recording legend Charley Pride entitled "A Tribute to Jim Reeves", which incorporates MediaCloQ(tm). This agreement does not pay any royalties to us."

So if one assumes "commercially released" means it is paid for, it is the CD that was commercially released, but the technology was not commercially released. There were no royalties charged. Yet, the PRs deceptively try to attribute the "commercially released" description to the technology and not to the CD. Again, from the pr: "SunnComm’s copy-management technology was commercially released by Music City records in 2001".

So for all practical purposes, this was just a test release of the product, and is not different to the other CDs that had been commercially released in the US before it by others, with test versions of copy protection products. What's more, Fahrenheit only issued that one CD and never followed through with the 25K p.m. committment.

Posted by: K. Sutcliff | Oct 23, 2003 12:44:16 AM

If anyone wants a proper and complete description of my former relationship with SunnComm and my current relationship with Microsoft (employee). Please email me your Name, Address & Phone Number adn I will respond with a call or US Postal Letter.

Ken

Posted by: Ken Cavallon | Jan 25, 2004 8:47:29 PM

July 2008

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