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

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.)

Legal Threat: SunnComm Says Princeton Report Contains Erroneous Conclusions

Princeton student sued over paper on CD copying

Update 9:22am:
SunnComm is apparently dropping their lawsuit
Threat of lawsuit passes for student

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What's been said:

Discussions found on the web:
  1. Anon Nymous commented on Oct 12

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


    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,

    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*
    (Direct: 425.704.5240
    Fax: 425.936.7329
    Microsoft Corporation
    One Microsoft Way
    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.


    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!!!


    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!)


    (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.

  2. meta-roj blog commented on Oct 13

    the light gets hotter on sunncomm

    someone who occasionally drops into this blog (and someone on whom i’ve commented both in agreement and disagreement, which is a good thing) – left me a little teaser (see comments) in one of my posts on sunncomm. sunncomm, you…

  3. ataboy commented on Oct 17

    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


    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.

  4. K. Sutcliff commented on Oct 23

    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.


    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.”


    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.

  5. meta-roj blog commented on Nov 25

    a look back at sunncomm

    since i started talking about sunncomm, it’s been a bit of a saga here (1, 2, 3, 4), and i’ve used it as an example to emphasize a few of my own thoughts or theories. i left myself a note…

  6. Ken Cavallon commented on Jan 25

    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.


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