Patent Trolling, Shell Corporations, and Alleged Fraud in the Shadow of the Hollywood Sign

By Michael Carney , written on September 17, 2012

From The News Desk

RPost, a peculiarly-named Los Angeles “startup,” and its founders control patents that they allege Amazon, Paypal, and Belgian-banking cooperative SWIFT have violated. These patents are potentially worth billions of dollars because they may be central to much of the way the online payments industry operates today. The case has been winding through the courts and if RPost (no relation to R Kelly) is successful, the impact could be profound.

By now you’ve probably realized there’s a catch. And there is, a big one. Because there’s much more to the story, beyond the obvious patent trolling. There’s a series of Bermudan front companies, alleged fraud, and a host of other off-color shenanigans worthy of a Forbes cover story or a dozen Business Insider slideshows. And even if RPost wins, its shareholders will not receive a dime, despite the fact they essentially paid to acquire the patents.

The entire sordid tale began in the late 1990’s when three founders, Ken Barton, Zafar Khan, and Dr. Terrance Tomkow formed RPost, Inc. as a digital communications company specializing in verified messaging. In 2003, Barton suffered a minor stroke and took a medical leave of absence. As he tells it, this is when things veered horribly off track.

While he was absent, Barton alleges that his partners pushed him out of the company, replacing him on the board with new investor Semantec, ceasing to pay his salary, transferring all of RPost’s assets offshore to a Bermuda entity, and reclaiming all of his shares in the company.

This led to two lawsuits, the first over unpaid salary, and the second over the share transfer. RPost settled the first mid-trial in 2010 and in August of this year, Barton persuaded a judge to decide in his favor on the latter, wherein he received the return of his original shares, $100,000 in damages, and yet-to-be-determined punitive damages. In the process, according to court filings, Semantec also settled, forfeiting all RPost shares obtained through its $1.1 million investment and barring further association with the company.

While this may sound like a victory, during trial discovery Barton and his lawyers uncovered a series of additional shady dealings. Enter a collection of whack-a-mole international shell corporations, alleged fraudulent conveyance of company assets, and likely Securities and Exchange Commission violations.

At the heart of this tangled web are two patents. US 6182219 (“the 219 patent”) and US 6571334 (“the 334 patent”), both of which are described in the usual patent-ese as, “Apparatus and method for authenticating that a sender has sent certain information via a dispatcher to a recipient is disclosed.” The patents create a new way to authenticate service of electronic messages, or to prove that an e-mail or electronic payment was actually sent and received without relying upon key-based encryption.

Wait, you might say. That’s like patenting name your own price or those little cardboard sleeves that slide over your hot, steaming Starbucks cup. Right, and they’ve been patented, too. Don’t ask me to explain the U.S. patent system. And at any rate, RPost was originally accused of infringing each of these patents by their original assignee Authentix Technologies Limited. The case was dismissed on a technicality in 2007, and RPost subsequently acquired the patents...except, well, that’s not exactly what happened.

Instead, the two remaining founders, Khan and Tomkow, formed a new Bermuda company called RMail, which the two appear to own exclusively. To put it more bluntly, RPost shareholders seemingly own no part of this entity and stand nothing to gain should it create any value. This notwithstanding, in what seems to be an insider transaction, RPost then lent $1 million to RMail which subsequently acquired the 219 and 334 patents for a combined $750,000. With ownership of the patents secured, RMail licensed certain relevant “fields of use” or aspects of this IP to RPost, but kept additional highly-valuable provisions out of the licensing deal.

RMail, as owner of the patents and exclusive rights holder to the provisions of each relating to electronic payment authentication, used these patents in 2010 to sue several of the most successful internet companies around, Amazon, Paypal, and SWIFT, for alleged violations. The case was filed, where else, but in the patent-holder friendly district of Eastern Texas. To call this anything other than blatant patent trolling would be a bald-faced lie. Depending on the details of paper shuffling behind the scenes, it may turn out to be fraudulent as well.

Despite the efforts of these corporate giants, including a pile of attempted motions to dismiss, the suits have been allowed to continue and the patents themselves reaffirmed by the the USPTO following reexamination. According to the court, the claims have enough merit to proceed to trial. When I reached out to the companies, each declined to comment, citing their policies pertaining to ongoing litigation.

With the totality of the situation becoming apparent, Barton filed a fraudulent conveyance suit against Khan, Tomkow, and the RPost entities in July 2011. It was only as a result of the years of trial discovery that Barton now knows the extent of what supposedly transpired inside RPost. Due to a lack of information about the alleged self-dealings and similarly a lack of resources required to address them, few other shareholders have stepped forward to take action against the company’s insiders. Despite multiple attempts made by PandoDaily over several weeks to speak with RPost and its founders, we did not receive any response.

According to Barton, none of this activity was disclosed to or approved in advance by shareholders, of which Barton claims there are approximately 400 individual accredited investors who put in more than $25 million to date in $10,000 to $100,000 increments. The company continues to raise new funds today under private placement memorandum that would seem to contain misleading information should Barton's fraud accusations hold up in court. A March 2012 Form D exemption filed with the SEC indicates that RPost Communications, the latest entity created to “recapitalize” the company and continue all future international operations, had raised $2.67 million of a planned $10 million private placement offering.

In Madoff-ian fashion, the company’s auditor, Kabani & Co., is a small, little-known firm that itself is the subject of a PCAOB investigation regarding its work on a series of apparent Chinese “pump and dump” stocks. Kabani, which shares a building in Los Angeles with RPost, reportedly completed two audits of the company in recent years, although shareholders have not received any GAAP accounting of the company’s finances or its use of investment proceeds since the 2004 Semantec investment.

The only information the shareholders have seen are “huge opaque operational losses by the international company, with no idea where funds went,” according to one shareholder who wished to remain anonymous.

The extent to which the company has gone to keep information away from shareholders is staggering. All of its shareholder meetings are conducted by WebX conference, during which all questions must be submitted ahead of time and shareholders are not permitted to talk to one another. In an apparent effort to prevent collaboration, no shareholder register has been provided, despite requests from multiple investors.

At this point, the majority of RPost shareholders couldn’t even tell you which of the series of related entities they own shares in. Along the way, the founders have created RPost, Inc. (US), RPost International Limited (Bermuda), RMail Limited (Bermuda), and most recently RPost Communications Limited (Bermuda), shuffling shareholders and assets between them without notification or consent.

According to Barton and his counsel at Ashcroft Group, another early shareholder submitted a complaint to the Boston office of the SEC and has continued to provide updated information over the last year and a half including the August Statement of Decision in the case of Barton v. RPost, et al. To this point, the commission has not disclosed any change or acceleration of its ongoing investigation.

RPost claims to operate a “legitimate” business, based on managing verified electronic communications. The company has partnerships in place with the federal post offices of several countries including Saudi Arabia, Iceland, Columbia, and Peru. Previously, the company worked closely with former US Postmaster General Marvin Runyon who sat on its board and initiated a failed trial with the USPS.

But RPost’s messaging business seems to be just a fraction of its focus, if not a cover for its patent trolling. The RPost website advertises like a badge of honor dozens of additional intellectual property lawsuits that the company has filed from within its own patent portfolio, with plaintiffs including Adobe, DocuSign, RightSignature, AOL, Yahoo, and many others. Several of these relate to the 219 and 334 patent fields of use licensed from RMail, although the company owns dozens of patents in countries around the world.

A statement on the website from CEO and Chairman Zafar Khan reads, “RPost investors elected early on to develop a first class and global intellectual property portfolio with the foresight that there would be a point in time when RPost would have to vigorously defend its leadership position in the marketplace by asserting its intellectual property rights.”

Now that’s chutzpah. And who knows? Maybe he’ll be able to patent that, too.

[Illustration by Hallie Bateman]