VirnetX Holding Corp (VHC)

[nealhugh]

Re: ALL VALID: Re: Law 360 --- pls call me if interested. Neal H. Hurwitz 212-666-6217. TY!
https://pomerantzlawfirm.com/active-cases-rz/vhc
Tech Biz VirnetX's Brass Accused Of Bilking Millions
By Archive

Email Rose Krebs

" href="https://www.law360.com/articles/1281235/tech-biz-virnetx-s-brass-accused-of-bilking-millions?ts_pk=3d48cc83-49a1-4c7e-88a3-36bf95e6ef3e&utm_source=user-alerts&utm_medium=email&utm_campaign=tracked-search-alert#"; data-original-title="" title="" style="box-sizing: border-box; background: transparent; color: #0067b1; margin: 0px; padding: 0px; vertical-align: baseline; outline: none;" target="_blank">Rose Krebs
Law360 (June 9, 2020, 7:52 PM EDT) -- VirnetX Holding Corp. has been hit with an investor's derivative lawsuit in Delaware Chancery Court claiming its CEO and directors have "bilked millions of dollars out of the company" through years of excessive pay and self-interested actions.

In a suit made public Friday, stockholder Neal Hurwitz accused VirnetX's CEO, President and Chairman Kendall Larsen and other directors of corporate waste, unjust enrichment and breaching their fiduciary duty to the company. Hurwitz said his suit aims to hold VirnetX's officers "accountable for years of self-dealing and knowing misstatements."

He accuses the officers of "misrepresenting the company's business model and prospects in its SEC filings" while they have enriched themselves through excessive or unnecessary compensation. Initially filed under seal, the suit was made public Friday and comes months after Hurwitz filed another Chancery complaint that sought access to VirnetX's records to investigate potential wrongdoing.

In his December books and records suit, Hurwitz said he was concerned the software firm's CEO is running the company "as a personal piggy-bank" and that VirnetX isn't giving investors like him a clear picture of what's actually going on with the company's financial health.

There is a divergence between what the company claims as its business model and what it actually does, Hurwitz alleges.

"For over 13 years VirnetX has falsely held itself out as a publicly-traded technology company that 'develop[s] software and technology solutions for securing real-time communications over the internet,'" the more recent suit claims. "In truth, VirnetX is a notorious patent troll, deriving substantially all of its revenue from extortionate 'licensing deals' and patent litigation."

Hurwitz asserts the company has "spent years falsely touting its development of new patents and technology" and that the company's main software product, "a purportedly secure messaging program," has produced "no meaningful income for VirnetX and has attracted few users."

Instead the company has engaged in what Hurwitz called "patent trolling" by filing multiple lawsuits against major tech companies.

"From the beginning, the sole purpose of VirnetX has been to leverage its patents, many of which are now decades old and even predate the founding of VirnetX, in an effort to extort money from major technology corporations like Microsoft Corporation, Apple Inc., and Cisco Systems, Inc."

One of those suits involving Apple is headed for a retrial this summer in Texas federal court, with hundreds of millions of dollars in damages potentially at stake. In 2018, a Texas federal jury found that Apple's virtual private network systems infringed four VirnetX patents and ordered Apple to pay roughly $600 million, but the damages award was thrown out by the Federal Circuit, which ruled in November that Apple only infringed two of the four patents.

The case is now back in district court to settle the damages bill based on the trimmed infringement finding. Apple has argued that its customers do not use a redesigned version of its VPN On-Demand feature at issue in the case. The tech giant is also trying to strike down the patents at the Patent Trial and Appeal Board.

"The company's fortune rises, and falls based on the successes of its patent trolling activities," Hurwitz asserts.

But since the company's business model is focused mainly on "monitoring litigation and licensing deals," VirnetX should "be expected to have very little in the way of salary and overhead," the suit contends.

Instead, Hurwitz alleges the company is "plagued by nepotism, waste, and corporate governance failures."

"An incredible 33% percent of the company's employees are related to the company's top two executives and are paid exorbitant compensation while contributing little to nothing of value to the company or its stockholders," the suit claims.

The company has also paid "outsized and exorbitant compensation" to officers, including what Hurwitz alleges is millions spent on private air travel for Larsen and his wife.

Hurwitz flagged salaries of certain of VirnetX's executives, including Larsen's annual salary, which ranged from roughly $625,000 in 2016 to about $700,000 in 2018. He also asserted that Larsen has engaged in an "unusual pattern of stock sales" and "appears to be attempting to monetize his holdings in VirnetX while the company's stock price is still artificially inflated."

The suit seeks recoupment of "excessive and unearned compensation being paid to the executives, employees, and non-employee directors."

Allegations in the derivative suit are based, in part, on records obtained through his December records suit, Hurwitz said. Under section 220 of Delaware General Corporation Law, an investor can seek to have the Chancery Court compel a company to turn over records if the investor can show a proper purpose such as investigating wrongdoing.

"We consider this to be a nuisance lawsuit," a representative for VirnetX told Law360 Tuesday.

Counsel for Hurwitz did not immediately respond to a request for comment Tuesday.

Hurwitz is represented by Kurt M. Heyman and Gillian L. Andrews of Heyman Enerio Gattuso & Hirzel LLP, Gustavo F. Bruckner and Samuel J. Adams of Pomerantz LLP and Daniel Kuznicki of Kuznicki Law PLLC.

Counsel information for VirnetX wasn't immediately available Tuesday.

The case is Hurwitz v. Larsen et al., case number 2020-0425, in the Court of Chancery of the State of Delaware.

--Additional reporting by Mike LaSusa, Tiffany Hu, Ryan Davis, Dani Kass and Khorri Atkinson. Editing by Jack Karp.


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