New important facts SSYS shareholders should be aware of: Stratasys and its major insiders are being sued by founders of Objet for commercial misconduct
Founders of Objet (which has merged with Stratasys last year) are suing Stratasys (TICKER: SSYS), its management and its major insider shareholders for damages. Claims include alleged backdated issuance of shares, illegally diluting shareholders, non disclosure of interests of existing shareholders in certain investment transactions, commercial misconduct, deception and other claims. The lawsuit has been submitted to the District Court of the city Lod in Israel.
In 2 separate lawsuits, founders Mr Rami Bonen & Mr Hanan Gothait and other plaintiffs are suing Stratasys, Mr Elchanan Jaglom (Currently Director in Stratasys and Chairman of the Executive Committee; Jaglom served as Chairman of Objet Geometries Ltd and was its largest shareholder prior to the merger with SSYS in December 2012), Mr David Reis, CEO of Stratasys, Mr Ilan Levin, Stratasys board member, and a list of other shareholders.
The lawsuits furthermore claim that the defendants, led by Jaglom, effectively engaged in backdating the issuance of certain shares. The plaintiffs assert that despite Objet's reports to shareholders that certain shares have been issued in 2006 and 2007, they were actually issued at a subsequent date-as late as 2009.
The lawsuits which were submitted in March 2013 to the District Court in the city of Lod are:
Gothait and others against Stratasys Ltd and others; Case # 5475-03-13
Bonen and others against Stratasys Ltd and others; Case # 5988-03-13
It should be noted that these lawsuits, their content and appendices, are not generally available to the public. There is no online source where readers may view these documents. However, readers wishing to read the entire lawsuits should contact Stratasys, the courts of Lod, Israel, or the plaintiffs.
We believe that such allegations against the senior management and members of the board, alleging backdated issuance of shares, illegally diluting shareholders, non disclosure of interests of existing shareholders in certain investment transactions, commercial misconduct, deception and other claims, are material knowledge which current investors must be aware of when making investment decisions in the company.
The Bonen lawsuit spans over 227 sections and is supported by a mass of 39 exhibits including legal contracts, email correspondence, transcripts of conversations with board members and others. We have chosen to translate from Hebrew (the language in which the lawsuit was written and submitted to the courts) into English the major claims in this lawsuit. We have added subtitles summarizing the main points raised in each quoted section of the lawsuit and highlighted specific parts of the translated sections with bolded italics for easy reference to the main points raised by the plaintiffs.
Jaglom who is currently Director & the largest single shareholders of SSYS, is the main subject of this lawsuit. Jaglom and a group of investors who owned over 90% of Objet shares prior to the merger currently own over 40% of Stratasys shares. The defendants- Mr David Reis (the current CEO of Stratasys), Mr Jaglom & Mr Levin (Stratasys board members) and other major shareholders in Stratasys were respectively the CEO, directors and major shareholders of Objet prior to the merger.
Below are the major claims raised in the Bonen lawsuit.
Jaglom rampantly deprived plaintiffs
1. This lawsuit reveals a severe and systematic tractate of acts taken by the defendant 2 (hereinafter referred to as "Jaglom") - a controlling shareholder of the Company - the defendant 1 (hereinafter referred to as "Objet" or the "Company") who treated and used the Company as if it were his own estate, whilst systematically and rampantly depriving the plaintiffs, among of which is the plaintiff 1, the founder of the Company (hereinafter referred to also as "Bonen"). And so, Jaglom, taking improper actions that border on deceit, misrepresentations, and blatant violations of Legal and contractual provisions, had diluted and abraded to dust the holdings of the founders of the Company.
Jaglom concealed his moves from other shareholders
3. And it should be emphasized; Jaglom as a controlling shareholder together with a group of insiders, headed by Mr. Phillip Stone, who holds directly and / or indirectly the defendants 9-14 (hereinafter referred to as "Mr. Stone"), managed the Company in lack of transparency, whilst systematically concealing his moves from the other shareholders, and whilst compartmentalizing the other shareholders of the Company's true state. And so, until recently, Jaglom and his party of relatives hid behind a chain of mysterious foreign companies that hold shares of the Company, in such a manner that the identity of the shareholders and the stakeholders of the Company could not be revealed. The changes in the holdings of the shareholders of the Company due to various investment rounds were reported to the Registrar of Companies in retrospect, in years of delay.
Plaintiffs fraudulently concealed their identity as investors hiding behind foreign companies
13. Through the draft of this prospectus, which had come to the plaintiffs, the plaintiffs had first learned, that the shareholders who extended most of the first convertible loan, are also the shareholders who had participated in the investment round in September 2002, which was designated to impose in a retrospective and pretentious manner, the value of the shares collected in such round, on the conversion price of the shares within the first convertible loan. Not only had such new and substantial facts been revealed only now, such are facts that stand in contrast to the representation presented by those shareholders (through the Company), who claimed that the aforesaid round of investment will be led by foreign entities who are not among and / or related to the current shareholders of the Company. This deception is deeply rooted and substantial. It completed and realized an action plan designed by those shareholders, who attempted in this fraudulent manner to unilaterally change the terms of extension of the first convertible loan they had extend, so that they shall receive in return of the conversion of such loan a substantially higher amount of shares than that they were entitled to in accordance with the terms of the loan agreements.
Jaglom concealed the true state of the company for personal gain
19. And it shall be clarified; throughout all of the periods in which the diluting rounds had been conducted, Jaglom "had been careful" to maintain complete secrecy of the true state of the Company, and concealed from Bonen as well as from the other shareholders who are not among his party of relatives, Objet's true state. Only his party of relatives and members of his controlling group had received updates regarding Objet's promising true data and that party of relatives had also participated in the investment rounds, knowing that Objet's true worth exceeds by dozens of times the value by which such feigned investment rounds had been conducted.
Jaglom's group based investments on inside information not available to others
20. And so, Jaglom and his party of relatives had distributed among themselves enormous benefits at the expense of the founders and other shareholders who are not insiders and are out of reach of the channels of information. In such manner, Jaglom and his party of insiders overtook Objet for pennies' worth, while compartmentalizing the other shareholders, as well as diluting them massively, and improperly.
Jaglom acted rampantly
36. The defendant No. 2, Mr. Elhanan (Allen) Jaglom, is the living spirit and the executer of the rampant acts, which brought about the dilution of the plaintiffs' holdings in the Company. Jaglom served at certain times as the chairman of the board of directors of the Company. Jaglom holds substantial holdings in the Company, whether directly or indirectly, and he is among the controlling group of the Company. At some stage, Mr. Stone, Jaglom's associate, joined him, and as it shall be clarified below, was a party to these rampant acts.
Jaglom: the architect of the fraudulent dilution plan
66. Therefore, the architect of the fraudulent dilution plan that shall be detailed below is Jaglom. Jaglom is the one standing behind Objet's misleading notifications to the shareholders. In addition, Jaglom is the one who, using his cohorts, designed the dilution plan and initiated an investment round that shall retroactively change the bond conversion price he and his colleagues had extended to a price that is one tenth of the original conversion price.
Jaglom deceived shareholders
87. Thus, this work of art of deceit and misrepresentations designated to mislead the shareholders and distract them away from the massive dilution plan conceived by Jaglom and his cohorts. In such manner, they had presented to the shareholders a display according to which there is no change in the terms of the two bonds, and as if, the two bonds are of identical terms. Alas, in the small letters and in a sophisticated manner, a substantial sentence had been added to the second bond, according to which an alternative had been according to which it was possible to convert the loan with the terms of a future investment round. This sentence does not exist in the first bond.
Jaglom retroactively changed investment terms
89. Moreover, Jaglom and his colleagues had one intent and purpose in giving notice of the loan and the second bond. Their sole desire had been to retroactively change the terms of the loan and the first bond. Meaning, they were interested in applying the terms of the second bond, retroactively, to the terms of the first bond.
Mr Ilan Levin concealed material information; Company corporate governance misconduct
108. To complete the extract of the factual description regarding the final investment round, we shall note, that on February 24th 2003, a shareholders' meeting had taken place, in which the defendants had participated. During this meeting, the Company's attorney had repeatedly claimed that all of the raisings of the convertible loans had been at the same terms, in his words: "It is the same bond that had been distributed to the shareholders in the same form, once in November 2001 and a second time in August 2002".
Also present at that meeting, was Mr. Ilan Levin, who served as a director on behalf of Jaglom on the board of directors of the Company. As such, Mr. Levin had been asked questions within the shareholders' meeting and had refused to answer those. So, as he was asked what sum of money existed in the Company's register, he had refused to answer, despite the fact such is a significant issue, with an impact on the question if there is any need to conduct additional investment rounds, and if so- at what scope.
At the end of the meeting, a vote had been held regarding the approval of increasing the Company's capital and the approval of the transaction with the mysterious British investor (the details and identity of whom had not been disclosed at that meeting as well). This, despite the reservations voiced by Attorney Ibtzen who represented a part of the shareholders at that meeting, who voiced reservations regarding holding the meeting in the first place, including that: (NYSE:A) no shareholder type meetings had been held, despite the fact that approving the transaction with the British investor will affect both the ordinary shares' holders as well as the preferred shares' holders; (NYSE:B) that as far as a resolution had been passed approving the issues that had been brought to vote at the general meeting, such is null, in light off the conflict of interests of the directors who represent those shareholders who are to benefit from the result of the vote: "the Jaglom group and Scitex"; (NYSE:C) and that, it had been clear that the investment round was intended to bring about the conversion of the first convertible loan contrary to the terms set forth in such, and this at the value of $0.254 per share, while the terms of the loan set forth a conversion price of $2.5 per share, claiming that the bond terms are identical for both of the convertible bonds, something which is not true.
It shall be noted, that Attorney Ibtzen's reservation was not the only one at that shareholders' meeting. Thus, it had been discovered at that meeting that one of the shareholders who also served as a director of the Company at that time, Mr. Hanan Gutheit, had not been summoned to the board of directors' meeting, the agenda of which held voting on the issues that had been brought to be approved at the general meeting. It had also been learned, that Mr. Amos Bar Shalev, who represented at that meeting one of the shareholders, and who had served as an observer at the board of directors, had not been summoned to the aforementioned board of directors' meeting, and in fact, had not been summoned to any board of directors' meeting for approximately a year.
A copy of the minutes taken at the meeting dated February 24th 2003 is attached as Appendix 12 to the statement of claims.
Jaglom group misleads shareholders while extending second loan
113. Reviewing the draft of the prospectus, the plaintiffs had first realized , that in contrast with the misleading representation, the person who had extended the first convertible loan in January 2002, were no other than companies related and / or controlled by the Jaglom group, and in further detail:
Samason Capital, owned by the defendant 2 (Mr. Elhanan Jaglom), Roy Zuckerberg, and Mr. Michael Jaglom (note "6" on page 124 of the prospectus draft);
Tyres Tech LLC (the defendant 13) owned by Mr. Phillip Stone (note "12" on page 124 of the prospectus), who is, as aforementioned, associated with Jaglom.
And, Mr. Michael Jaglom, Elhanan Jaglom's cousin.
Levin submitted a false affidavit
115. It had been learned, that the entire move of conducting an investment round and the change in the conversion terms of the second loan (whilst attempting to apply the same conversion terms also to the first convertible loan), had not been made for the purposes of the Company, of a true need and according to a real value. All had been done for the purpose of serving the Jaglom group and his associates. Of course, to complete the move, it had been required to conceal such fact and to present fraudulent representations to the existing shareholders, as if the second convertible loan is at the same terms as those of the first one, and that the investment round of September 2002 includes an investment of exterior investors, who are not among the present shareholders of the Company. And so as if the aforementioned regards mysterious exterior investors, who agreed to invest only at such ridiculous value, Jaglom and his cohorts would be able to justify the investment round claiming it was required for the Company's activities, and there was no alternative other than agreeing to such terms.
In this regard, it shall be noted, that for the purpose of achieving the concealment, in specific concealing the new facts that had been discovered only recently, the director on behalf of the Jaglom group, Mr. Ilan Levin, did not balk at submitting a false affidavit within a legal procedure that had taken place (and that shall be detailed below) between some of the shareholders of the Company against the Company and against the Jaglom group and those on its behalf. In this affidavit, Mr. Levin claimed that the investors in the first investment round from October 2002 are new investors who are not among the existing shareholders, and that the Company had located them (no less). And so is stated:
"Towards the end of 2002, the Company had located investors who had not been among the shareholders of the Company up to that date, and who were willing to invest 2,000,000 US dollars at the value of only 20 million dollars, and who had stipulated their investment upon an additional investment of the existing shareholders in the sum of 500,000 dollars and provided that all of the convertible bonds issued up to such date are converted into shares".
This is the same Mr. Levin, who avoided answering the questions he had been asked at the shareholders' meeting that took place on February 24th 2003 (as detailed above).
A copy of Mr. Ilan Levin's affidavit is attached as Appendix 14 to the statement of claims.
Jaglom compartmentalized investors from receiving information
125. Moreover, Jaglom methodically concealed- at the same time of the conversion- significant information from the shareholders and the potential investors as one. This way, upon notifying one of the shareholders of Objet- a Company named TDA- of the investment round with the British investor and the diluting conversion, that shareholder complained that Jaglom had compartmentalized him as well as the other shareholders from receiving information regarding Objet, and that, despite the fact that such shareholder was willing to invest in Objet, especially in light of the dilution effect he had been harmed by following the round of conversion.
A copy from the e-mail correspondence with TDA, within which TDA complained that Jaglom had concealed information and prevented it from investing, attached as Appendix 16 to the statement of claims.
Jaglom fraudulently dilutes founders and shareholders
133. In addition, if we wish to present a further seal indicating of the fraudulent acts orchestrated by Jaglom, just recently the plaintiffs have come across a transcript of a conversation between Jaglom and a former senior employee of the Company, within which Jaglom unraveled the scheme.
Following are chosen sections of the transcript:
"Jaglom:…so finally I told Agassi, listen, we have decided that we continue the cash flow, and calculated that it is necessary to put into the Company an additional 12 million dollars. And by the way, we were not mistaken, it came out to 14, but we thought 12. And we will uplift the Company. Agassi scratched his head, went to talk with his boss, it was, what was his name? It was still I.D.B, it doesn't matter, and said: O.K., provided that we erase the past. I don't want for anybody to have no shares here, as I don't want to carry anybody here on my back.
So now I have to risk more ah. They were, the ownership was such that they needed to put in about a third of the shares, a third of the money, or a quarter of the money, I don't remember anymore, a quarter I think. A quarter. A quarter exactly. And I said why erase everything, what's the good in erasing everything?
Jaglom wishes to delay IPO to cover his unfair low valuation investment
151. Other than the clear data stemming from the opinion, it shall be clarified that recently, while preparing to file this claim, a transcript of a conversation between Mr. Jaglom and Mr. Kreitzman in 2005 had been brought to the attention of the plaintiffs. Mr. Kreitzman had served as a senior executive and complained that his options package had been cut back. Jaglom argued in this conversation, that there is no basis for Mr. Kreitzman's complaint as the price of realizing the options which was at 0.25 dollars per share, was a price that embodied great benefits as it was detached from the value of the Company at such time. Such to show, that according to Jaglom, it was already possible to issue the Company at the value of hundreds of millions of dollars, similar to Stratasys, although he wishes to delay the IPO by a year or two, among others, due to the fact that shall the IPO succeed at the value of hundreds of millions of dollars, such shall raise questions regarding the low value of the Company by which options and shares had been allocated as of late, and the various fundraising rounds had been held.
Jaglom manipulates IPO timing to conceal unfair option grants
152. Following are parts of that conversation:
"Allen: it is related, but I have received, received letter. I have already had…lawsuits.
In any case, it isn't the same Company. All this, this speech, I want to tell you, I really had to persuade the, the American and Swiss shareholders, that it is necessary to distribute options. As the why had been raised, why backwards? Distribute forwards. Why backwards? I said: no, I want to distribute something backwards, so everybody will feel he has, he will have something, and from here onwards we will make a new plan.
o.k., fine. This is the situation. You haven't given up anything. What have you given up? You gave up options at 2.5 dollars that aren't worth anything. You got for 25 cents, a little more than you had previously, I don't know what the numbers were exactly, and I think it was a little more than what you had in shares, and like all of the rest, and it is not the same Company.
This is the entire speech I have to tell you and I can also tell you numbers. I think that what will happen here in the Company, the minute I need it, and also because of the ones investing such, and I think what will happen here, will be some IPO, could be a year, two years, something like that. Maybe not a year, let's say two years, something like that. And then each one, and his shares will be public shares, may do with them as he pleases. And this must be postponed.
Allen: No. his agreement is already behind. It is behind, that is what I've been saying all along. Everybody had been given the vesting the minute he started working.
Allen: And then, what did I want to say? Then the shares, since it is also necessary to be a little cautious, because it is impossible to do an IPO tomorrow morning, because that, it wouldn't seem right if we do an IPO according to a dollar per share, or two dollars, a dollar and a half - how did they give at 25? That also cannot. So it is necessary, it is necessary to wait a little, but I expect that, you won't be a millionaire from this, but it will be worth, in my opinion, a million dollars…".
(A copy of the transcript of the conversation between Jaglom and Kreitzman had been attached as Appendix 17 to the statement of claims).
(end of quotes from lawsuit).
The lawsuit was initially reported in TheMarker, Israel's leading financial newspaper, and can be viewed in Hebrew on this url:
It is surprising that Stratasys has chosen for its internal reasons not to issue a dedicated press release of these 2 lawsuits. Instead, the company chose to provide minimal disclosure and opine that claims are baseless, in its recent financial reports. Stratasys has submitted their defense regarding these lawsuits to the court and are awaiting hearing.
Source: Stratasys 20F (submitted to SEC on March 7, 2013, Page 93).
It should further be noted that in its 2012 annual reports Stratasys discloses that there are several other pending lawsuits against the company (1 is a proposed class action against the merger with Objet, 2 by former employees, and 2 by former distributors & suppliers), all of which can be reviewed in the company's recently submitted 20F.
We do not believe that the founders suing the company are known for being litigious. In a search of the Israeli lawsuit database website Psakdin.co.il, which archives Israeli civil and criminal court rulings, we have not found any litigation initiated by either of the founders in the past decade. Readers are invited to check this database (in Hebrew) at:
The lawsuit, in its entirety, raises many questions regarding the business conduct of the senior management of the company, of its largest shareholder and of Objet. The allegations raised, which are supported by documentation, throw a very negative light upon the company's conduct. We note that the plaintiffs still serve as board members and largest insider shareholders of the company.
Disclosure: I am short SSYS. I wrote this article myself, and it expresses my own opinions. I am not receiving compensation for it. I have no business relationship with any company whose stock is mentioned in this article.