Eight Current and Former Executives Named as Co-Defendants, Including former CEO O'Dell and New CEO Swidarski
Class Action Suit Alleges Fraud, Insider Trading, Manipulation of Stock Prices, Concealment of Known Flaws in Voting Machines and Company Structural Problems
By Brad Friedman on 12/13/2005, 12:15pm PT  

The BRAD BLOG can now report that a Securities Fraud Class Action suit has been filed against Diebold, Inc. (stock symbol: DBD) naming eight top executive officers in the company as co-defendants. The suit has been filed by plaintiff Janice Konkol, alleging securities fraud against the North Canton, Ohio-based manufacturer of Voting Systems and ATM machines on behalf of investors who owned shares of Diebold stock and lost money due to an alleged fraudulent scheme by the company and its executives to deceive shareholders during the "class period" of October 22, 2003 through September 21, 2005.

The suit was filed today in U.S. Federal District Court in Ohio and alleges the company "artificially inflated" stock prices through misleading public information designed to conceal the true nature of Diebold's financial and legal situation. The defendants are also alleged to have attempted to disguise well-known and ongoing problems with Diebold's Voting Machine equipment and software. Additionally, the suit alleges insider trading by defendants resulting in proceeds of $2.7 million. Remedies are sought under the Securities Exchange Act of 1934.

The suit, filed by the law firm Scott+Scott, LLC on behalf of Konkol and the plaintiff class, names former Diebold CEO and Chairman, Walden O'Dell as a co-defendant along with seven other current and former officers of the once-venerable company.

News of the pending litigation was first reported as imminent in an exclusive report by The BRAD BLOG late last week.

Yesterday, in a surprise announcement, O'Dell unexpectedly resigned from the company. A Diebold press release described O'Dell as leaving the company for "personal reasons". He was immediately replaced by the company's president and chief operating officer, Thomas W. Swidarski, who had directly overseen Diebold's Election Systems subsidiary division for some time. Swidarski is also named as a co-defendant in today's class action suit.

After news was released of weaker-than-expected third-quarter earnings on September 21, Diebold stock prices plummeted 15.5% in unusually heavy trading that resulted in a one day sell-off costing investors more than $40 million dollars. The complaint describes Diebold and the co-defendants as having "failed to disclose adverse facts known" to the company and that they "participated in a fraudulent scheme and course of business that operated as a fraud."

The suit, to be released in full by The BRAD BLOG shortly, (UPDATE: Full suit now available for download here) alleges Diebold and the eight co-defendants failed to alert investors to adverse facts known to the company, choosing instead to participate in a "fraudulent scheme and course of business" that operated as a fraud or deceit on the company's shareholders.

The suit describes the liabilities of the company and co-defendants as follows...

Each defendant is liable for (a) making false statements, or (b) failing to disclose adverse facts known to him about Diebold. Defendants' fraudulent scheme and course of business that operated as a fraud or deceit on purchasers of Diebold publicly traded securities was a success, as it (a) deceived the investing public regarding Diebold's prospects and business; (b) artificially inflated the prices of Diebold's publicly traded securities; (c) allowed insiders to sell over 51,000 shares of Diebold stock, for proceeds of $2.7 million; and (d) caused plaintiff and other members of the Class to purchase Diebold's publicly traded securities at inflated prices.

...THE DEFENDANTS...

Named as co-defendants in the suit along with former CEO O'Dell and new CEO Swidarski are President of International Operations, Michael J. Hillock; Senior Vice President of Customer Solutions, David Bucci; Interim Chief Financial Officer, Principal Accounting Officer and Controller, Kevin J. Krakora; Vice President and Chief Information Officer, John M. Crowther; Senior Vice President and CFO, Gregory T. Geswein; and President and COO, Eric C. Evans. (Titles applied to the named co-defendants during the class period. Evans, for example resigned from the company on the same day as the Sep. 21, 2005 announcement.) "Each individual defendant," the suit points out, "owed a duty to the Company and its shareholders not to trade on inside information."

The claim cites a number of allegedly misleading news releases pertaining to the fitness and security of election systems as contracted by Diebold in San Diego County in 2003; their settlement for $2.6 million with the state of California in 2004, wherein Diebold is alleged to have concealed "the dimensions and scope of internal problems at the Company" from investors; and an "astonishingly low and incredibly inaccurate" statement about "restructuring charges" in the Sep. 21 announcement.

Once again, quoting from the lawsuit:

During the Class Period, defendants knew and concealed that:
(a) the Company remained unable to assure the quality and working order of their voting machine products;
(b) the Company lacked a credible state of internal controls and corporate compliance;
(c) the 2004 settlement with the State of California served to conceal from investors the dimensions and scope of internal problems at the Company, impacting product quality, strategic planning, forecasting, guidance, internal controls and corporate compliance; and
(d) the Company's "prediction" of astonishingly low and incredibly inaccurate restructuring charges for the entire 2005 fiscal year grossly understated the true costs defendants faced to restructure the Company.

The complaint alleges that the company lied to investors about the true costs of its restructuring activities, concealing the fact that Diebold was facing far worse restructuring issues than publicly represented --- indicative of far greater problems than the company was willing to reveal.

For example, the complaint indicates that the problems Diebold faced in California in 2004 were merely the tip of an internal structural iceberg which the company had sought to conceal from investors when they decided to make a settlement in the case. Investors could not know then that the problems revealed by the California litigation in 2004 were a sign of more and deeper internal problems to come. The settlement agreed to by Diebold in that case, the suit alleges, was meant to keep a lid on the larger dimensions of the problems, rather than indicating that the issues at stake had been fully resolved. Press materials released by the company announcing the settlement --- and included in the version of the complaint filed today --- seem to indicate otherwise to investors.

...THE INSIDER...

Additional facets of the company's internal structural problems were revealed in a series of previous BRAD BLOG articles reporting on an anonymous company insider we dubbed "DIEB-THROAT" who alerted us to the "Cyber Alert Warning" issued by a branch of the Dept. of Homeland Security in August of 2004. That warning concerned the vulnerability to hackers of Diebold's central vote tabulating software prior to last year's Presidential Election. The election watchdog organization BlackBoxVoting.org, who had first discovered the vulnerability, had also recently arranged for a computer security expert to successfully hack into actual Diebold voting machines used in Leon County, Florida without leaving any trace of the manipulation.

It was just several days after our first report on DIEB-THROAT that stock prices plunged at the company in September. Diebold attempted to blame their troubles, at the time, on bad weather in the gulf which lead our insider source to aver: "Using Hurricane Katrina is a poor excuse for bad products - the last time this kind of deception occurred it was called Enron."

Internet news site, The RAW STORY recently ran their own interview with DIEB-THROAT revealing still more structural problems within the company and its voting division. The report explained that the company was "plagued by technical woes," even as a Diebold spokesperson claimed the 144-year old company "has a sterling reputation in the industry."

...THE PLAINTIFF...

Plaintiff Konkol, a just-retired 29-year public school employee from Central Wisconsin first invested in Diebold in 1999. She told The BRAD BLOG that she purchased the stock thinking, "ATM's that'd be the way to go." She originally invested $500 which eventually grew to $1400 before falling. She is also invested in Diebold via mutual funds held by the Wisconsin Education Union in which she is a member. Konkol, a 56-year old grandmother of three, recently returned from two weeks of volunteering on the Gulf Coast with several members of her Lutheran church. "We got a big group together and we went down to the Gulf to help out in Katrina."

"I believe in churches...I believe we should practice what we're preached to about," she told us. "I don't like it when big companies take advantage of us little people," she said. "I can't say that I'm anti-big business...I just want things to be fair."

It appears that Scott+Scott, the attorneys associated with the case, are just beginning to learn about the full scope of the fraud allegedly perpetrated by Diebold on investors. Amended complaints with additional details are expected to be filed in the weeks and months to come. Other law firms are also expected to file similar suits which will eventually be consolidated by the Federal District Court hearing the case. Indeed The BRAD BLOG has been contacted since filing our original report on this last week, by other firms who are said to be pursuing similar litigation against Diebold.

...THE REFORMERS...

As one of America's largest Voting Machine Companies (along with ES&S, they account for the tabulation of more than 80% of America's votes every election) Diebold has been the target of Election Reform advocates for their strong partisan support of Republican causes and candidates, a statement made prior to last year's Presidential Election to Republican fundraisers by O'Dell that he was committed to "delivering the state of Ohio" to George W. Bush, along with their reluctance to include verifiable paper ballots with their voting products and to make the source-code for their software open and available for public inspection.

A recent 100+ page GAO report, shamefully unreported by the mainstream media, confirmed many of the Election Reform advocates concerns about the security and vulnerability of Voting Equipment made by Diebold and other such companies. In California, a recent mock election test revealed that some 20% of Diebold touch-screen voting machines failed to operate as expected after being previous decertified for similar failures and vulnerabilities. Despite that, California's Republican Sec. of State Bruce McPherson remarkably is considering re-certifying those same machines in the state which Diebold has described as America's "largest voting market."

Diebold was one of seven major American Voting Machine companies named in Velvet Revolution's "Divestiture for Democracy" campaign launched on Presidents' Day last February. The campaign demanded accountability and openness by the Voting Machine Companies in what Velvet Revolution deemed a "patriotic duty" to "ensure free, fair and transparent elections" by the private companies entrusted with running our sacred public democracy. The BRAD BLOG is a co-founder of VelvetRevolution.us.

Konkol's complaint as filed today demands "a trial by jury."

The BRAD BLOG will of course, compile an extensive, accurate and verifiable paper trail in regards to this story as it continues to unfold...

UPDATE: Scott+Scott, LLC releases news of the case filing in a press release here...

FURTHER UPDATE: Reuters picks up the story. Unable to get comment from Diebold.

UPDATE 12/14/05: A full copy of the complaint is now available for download here

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