Document Security Systems Inc. (DSS), the patent assertion company run by CEO Jeffrey Ronaldi, is facing a shareholder derivative lawsuit over alleged mismanagement since the 2013 merger of DSS with Lexington Technology, which coincided with its emphasis of patent monetization.
The suit, was filed April 28 in the Supreme Court of the State of New York in Kings County by Benjamin Lapin, was disclosed by Rochester, N.Y.-based DSS in a filing with the Securities and Exchange Commission.
Lapin, who is the founder of Stock Market Recovery Consultants Inc., a stock arbitrage consulting firm, said in a telephone interview "I personally believe there's a lot of hanky panky going on there."
The merger with Lexington "was a disaster," Lapin said. "It was a good company with sales and then they do the merger and that's the end of it," he said.
When DSS merged with Lexington it described the deal as a strategic combination that would increases its intellectual property portfolio and enhance its ability to monetize its anti-counterfeit and authentication technology, as well as its industrial and other intellectual property assets.
Lapin said that's when the promotion of the IP monetization began in earnest.
They brought in Red Chip to promote it, Lapin said. "To me, it's a pump and dump."
After the deal went through, DSS management allowed all the Lexington people to sell their stock, Lapin said.
"Did they get duped? How could they allow that?"
Lapin said DSS management "is impossible. They're corrupt. They don't want the stock to go up because they want to scoop it all up when it goes down."
Shares of DSS currently trade at 25 cents and have traded between 25 cents and $1.62 over the past year.
The complaint names DSS, as well as Ronaldi, Chairman Robert Fagenson, COO Peter Hardigan, President Robert Bzdick, CFO Phil Jones and directors Jonathon Perrelli, Warren Hurwitz, Ira Greenstein and David Klein.
It alleges, among other things, breach of fiduciary duty, gross mismanagement, abuse of control, and waste of corporate assets since October 2, 2012, and alleges that demand on the board to take action would be futile.
According to the complaint, "rather than utilizing Lexington's assets in conjunction with DSS' own assets as was put forth in DSS' press releases prior to the merger, once the merger had become completed, DSS essentially became a 'patent troll,' filing losing suit after losing suit utilizing Lexington's patents, while ignoring its existing and profitable business relating to plastics, packaging, printing and digital security.
"In essence, DSS took a very risky (and losing) gamble at the expense of DSS shareholders, with absolutely no reasonable basis for doing so."
Shares of DSS were trading above $5 a share in 2011 and touched a high of $5 in 2012.
DSS swung to a net loss of $41.2 million in 2014 because of impairment charges of $37 million related to the write down of patents associated with an adverse ruling in an infringement case brought by the company's Bascom Research LLC unit in January.
Lapin is seeking unspecified damages, attorneys' fees, and other costs and expenses.
“The company believes that all of the claims in this lawsuit are without merit and they intend to vigorously defend against these claims, but are unable to predict the outcome or reasonably estimate a range of possible loss,” DSS sanding the filing.
DSS officials couldn’t be reached for further comment.
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