Pay by Touch's backers claim fingers burned

  • Article by: MATT McKINNEY
  • Star Tribune
  • April 26, 2008 - 5:20 PM

Supermarkets across the country quietly pulled Pay by Touch kiosks from their checkout lanes last month, ending a shortlived experiment that allowed customers to buy groceries using only a fingerprint.

Few grocers had a ready explanation for the system's demise. But questions of whether consumers were willing to entrust their financial information to a fingerprint became almost secondary to the battles between Pay by Touch's luminary investors and its founder, a former Minneapolis resident best known for helping expose an insider trading scheme.

John P. Rogers founded San Francisco-based Pay by Touch in 2002, shortly after departing Minneapolis with a trail of tax liens and civil and criminal judgments behind him.

Rogers, who did not return phone calls for comment, has filed for bankruptcy, as has Pay by Touch. Investor lawsuits claim his mismanagement was the reason the company burned through $300 million in financing while building a network of 3,000 locations and 3.6 million customers, striking agreements with Discover Card Services, Citigroup and Supervalu along the way.

"The technology was good," said John Frank, an expert on electronic payments systems who with Rogers co-founded Solidus Networks Inc., the company behind Pay By Touch. Big players in the supermarket industry, including Clinton pal Ron Burkle, lined up behind the company that said it would bring biometrics payments to the retail industry.

Burkle, along with the Getty Family Trust and Rembrandt Venture Partners, put $55 million into the company. Other investors included Och-Ziff Capital Management, Plainfield Asset Management and Farallon Capital Management.

"John was pretty good at raising money," said Frank, who said he last spoke to Rogers in 2003. A missed opportunity to go public along with the collapse of credit markets last year hurt the company badly, said Frank, who claims a loss of about $750,000.

Pay By Touch used investor money to buy rivals, including Virginia-based BioPay for $82 million in 2005. But Rogers' company had little to show in the way of revenue. According to its Chapter 11 filing, 2006 revenue totaled less than $2 million. In the 12 months before that filing, Rogers received total compensation of $355,816.

Investors at Plainfield, a principal owner in Solidus with up to $140 million in debt and equity financing, grew increasingly worried as defaults piled up in late 2007. The final straw, according to lawyers for Plainfield, was a series of e-mails Rogers sent referring to "various manic fundraising efforts" that he was undertaking while simultaneously leveling "various depressing threats" against existing investors.

Absent customers

In an effort to take control of the company, Plainfield filed a suit last October in Chancery Court in Delaware, where Solidus is incorporated, asserting: "Solidus has accumulated substantial losses since inception, and has not achieved significant revenues to date."

Supervalu declined to say how many people used the system during its two-year presence in Cub stores throughout the metro area, but a spokeswoman said the number "wasn't significant."

Supervalu, like retailers everywhere, stopped taking payments via Pay By Touch after Solidus Networks shut down its network March 20.

About 750 people who had worked at Pay by Touch's San Francisco office had lost their jobs. Small investors were wiped out. Some filed suit.

The company's major assets, including its biometrics system, were sold through bankruptcy court earlier this month to some of the investors, including Plainfield and Och-Ziff.

Government informant

Rogers first came to prominence in Minnesota as a whistle-blower in one of the largest tax fraud cases and insider-trading rings ever prosecuted in Minnesota.

He met with IRS investigators in 1999 to report what he alleged were errors in the tax filings of Robert R. Hibbs, a Minneapolis businessman whose wife had moved in with Rogers. The ensuing investigation resulted in the discovery of an insider-trading ring that included venture capitalist George Kline. Both men went to federal prison.

By the time investigators were wrapping up their work on the tax fraud case, Rogers had moved to San Francisco. His relationship with Susan Hibbs had deteriorated. She filed a restraining order against him, and he in turn filed one against her.

It was not his first brush with the law.

Rogers' history of criminal offenses in Minneapolis included traffic violations, misdemeanor charges of disorderly conduct and domestic assault. He also faced civil judgments for unpaid bills, including liens in 1992 and 1996 of $23,198 and $7,382 for unpaid state taxes and about $12,000 from three separate judgments between 1992 and 2001.

What, if any, of this background was known to investors wasn't clear. None of the major investors in the company responded to requests for interviews for this report, including the Getty Family Trust, Plainfield Asset Management, Och-Ziff Capital Management Group, or Burkle's Yupaica Co.

A former company executive, Jon Siegal, filed a securities fraud lawsuit against Rogers last fall, alleging that the former CEO hid his past from Siegal and other investors.

In his lawsuit, Siegal, who purchased 166,667 shares of the company in 2003, said, "Rogers' background, if known, would have led a reasonable investor to conclude that Rogers ... should not be, and could not reasonably be entrusted to manage the company."

Dodd Hyer, a doctor in Las Vegas who invested in Pay by Touch, said some investors may pursue criminal charges in the wake of Pay by Touch's collapse. He said he still believes in the biometric payment systems that link a person's credit card and bank information to the person's fingerprint.

"If this company had been managed properly, it could have replaced major credit-card companies," Hyer said in an e-mail. "Someone, somewhere will do exactly that."

Matt McKinney • 612-673-7329

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