September 29, 2007 in Business

Company files suit against ex-CEO

By The Spokesman-Review

Spokane technology company NextSentry Corp. sued former CEO Jim Hereford on Wednesday, alleging he knowingly made “false and misleading” statements about the company’s operations and prospects to its board and shareholders.

NextSentry claims Hereford violated the Washington Consumer Protection Act and his fiduciary duties to the company, according to the 16-page lawsuit filed in Spokane County Superior Court. The lawsuit claims he falsely said some sales contracts had been closed and caused fictional contract amounts to be booked as assets, resulting in the company overstating its 2006 revenues by about $205,000, or 59 percent.

The suit asks for unspecified monetary damages and legal fees.NextSentry claims it must repay seven investors a total of $373,000 that they invested, based on false information, between Jan. 23 and March 20 and pay interest totaling about $19,000.

The board would have removed Hereford in late 2006 “had it known of the misrepresentations and falsified financial records,” according to the lawsuit.

“The misstatements concealed Hereford’s lack of performance and denied the opportunity to the Board to remove Hereford and install new management capable of meeting sales goals and maintaining investor confidence,” according to the lawsuit.

Hereford, who once tried to sell his Rosalia home through an online contest, declined comment Friday. He referred questions to attorney Douglas Siddoway.

“The allegations of the complaint are denied, and the charges will be vigorously defended,” Siddoway said, adding that Hereford actually will be defended by Siddoway’s wife, Laurel.

Hereford was relieved of his duties by NextSentry’s board of directors in mid-July, Douglas Siddoway said. Hereford was hired as CEO in March 2006, according to court documents.

Founded in April 2006 as a subsidiary of Next IT Corp., for which Hereford was chief operating officer, NextSentry offers electronic desktop systems meant to prevent workers from distributing sensitive data outside the company. Next IT is the primary shareholder in NextSentry and has occasionally loaned the firm money, according to the lawsuit.

Attempts to reach a Next IT executive for comment were unsuccessful Friday.

While the company recorded nine sales to customers in 2006, Hereford directed employees to record four of them as revenue, contrary to NextSentry accounting policy and general accounting principles, the lawsuit alleges.

The board had set a goal of $600,000 in sales from its inception through December 2006. For this year, the company projected annual sales of about $4 million, with net profits of about $52,000, according to the lawsuit. NextSentry’s strategic objective was “to meet its sales goals and achieve a liquidation event within two years allowing original investors to realize a profit.

“Achievement of stated sales goals was critical to obtaining the additional working capital necessary for ongoing operations and establishing credibility the investment community,” according to the lawsuit.

In one instance, the lawsuit alleges, the company recorded a $60,000 sale to Umpqua Bank, but there was no signed contract, software or services delivered. NextSentry alleges Hereford directed that an invoice be prepared and recorded, which remained as an account receivable through June but was never presented to the bank. Hereford also allegedly told the board in December that the deal had closed.

NextSentry also claims Hereford directed a $75,000 invoice to Newport Hospital be recorded but not sent to the hospital, and it also remained on company books through June.

The suit alleges Hereford “continued his false statements” until asked to produce the Umpqua Bank and Newport Hospital contracts at a July board meeting.

“Hereford told the Board he had the contracts in his desk,” according to the lawsuit. “When asked to go and get them, Hereford left the room, and when he returned he told the Board that the contracts were in the hands of clients. When again confronted, Hereford finally admitted that Umpqua Bank had not signed a contract with the Company.”

The suit also alleges that:

“ Hereford took an unauthorized $45,000 salary increase last year.

“ The Bank of Whitman approved an unauthorized loan of $250,000 in May to Hereford that it wouldn’t have otherwise approved and the company might need to repay.

“ Next IT advanced about $144,000 to the company that it wouldn’t have otherwise done.

NextSentry claims it’s employed legal and forensic accounting experts for $75,000 and spent $25,000 in employee time on the lawsuit.

The parties are scheduled for a case status conference July 11, Douglas Siddoway said.

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