Since its nationally televised media blitz in which seven Americans were implanted with high-tech identification biochips – a promotion meant to jump-start the manufacturer’s ambitious, multi-billion-dollar business plans – Applied Digital Solutions has instead become increasingly mired in controversy and lawsuits.

  • Despite all the hoopla and hype, the financially troubled company’s star product, VeriChip, got stuck in the starting gate as the Food and Drug Administration launched an investigation into whether the product had been misrepresented.

  • The company has, to date, become the object of at least four class-action lawsuits filed on behalf of stockholders.

  • The company has changed internal auditors twice since April, and Nasdaq has threatened to de-list the Palm Beach, Fla., company.

And now, the company’s much-touted deal with the California Department of Corrections to track Los Angeles County parolees, announced to the public and investors back on Nov. 7, is log-jammed. Despite the Miami Herald’s report in March that “Los Angeles County parolees are being monitored by Digital Angel through a three-year pilot program” – intended to monitor paroled sex offenders in the Los Angeles Country area – ADS has yet to produce a single working unit that can do what was promised, according to the California Department of Corrections.

“It’s not happening,” Russ Heimerich, California Department of Corrections spokesman for the Los Angeles County prison system, told WorldNetDaily. “We’re not prepared to use it without making sure it works and fits in with established protocols. It’s probably not going to be happening until the beginning of next year.”

ADS’s Nov. 7 press release had stated: “Using Digital Angel’s advanced location and monitoring technologies, State authorities will be able to monitor the location of parolees on a real-time basis.” It added that the agreement would facilitate Digital Angel working closely with “the Governor’s Office of Criminal Justice and Planning, the California Department of Corrections, and local authorities in demonstrating the effectiveness of its advanced GPS Security and Location systems.”

“This monitoring system is a cost-effective community-service program,” said Amro Albanna, an officer of Digital Angel Corporation and president of the operation center based in Riverside, Calif., in the press release. “The system is designed not only to monitor the location of parolees, but also to provide the appropriate authorities with an advanced warning when violations occur. We hope this program will serve as a model for other counties in the state.”

The problem, said Heimerich, is that “the company has a lot of experience with the software used in GPS tracking, but not a lot with the hardware. They’re still developing hardware with the capability of that type of tracking system. They’re working to develop an anklet/bracelet, but so far it has not happened.”

Heimerich also emphasized that ADS created much confusion by issuing a press release, which “caused a lot of people to think the project was a lot further along than it is.”

A professional stock analyst/trader and former adviser to CEO Sullivan and Applied Digital, who asked to go unnamed for this report, agreed: “When you view the timing and substance of the press releases of both ADSXE [ADS’s Nasdaq symbol] and DOC [Digital Angel Corporation’s Amex tag], it becomes evident that the focus is stock promotion and not the release of relevant news. My experiences with Dick Sullivan always saw promotional value placed considerably ahead of newsworthiness. When your objective is immediate stock activity, it really doesn’t matter at all if anything substantive results, since the stock activity is the true objective. This kind of behavior is more indicative of a bulletin board stock than a Nasdaq stock.”

In a new development, Digital Angel Corp. today announced a partnership with BI Incorporated, which gives the latter the rights to incorporate Digital Angel’s GPS technology and wireless platforms into products “that will allow continuous 24/7 monitoring of offenders who are under community supervision.”

However, BI Inc. spokeswoman Monica Hook told WND that currently neither Digital Angel nor BI Inc. has the hardware to create a finished product, and that the new partners have “no timeline put together” as yet, although one may be developed in “a couple of months.”

When pressed about BI products such as SkyGuard, as well as previous press releases and newspaper stories about GPS tracking systems developed by BI, Hook said that none of them “worked” or ever went beyond testing to market.

She added that her firm hopes to compete with industry leader Pro Tech, currently the only company having units actively tracking convicted offenders. Their products are used in 120 jurisdictions in 27 states, and their second-generation products are currently being beta-tested.

Pro Tech President and CEO Steve Chapin told WND, “the press release sounds like a lot of hype,” adding: “We see a lot of that, not only with Digital Angel and BI Inc., but with other companies as well — people saying that they are going to get something out there, but it’s a very hard thing to do successfully. It requires the right infrastructure and the right logic built into the system.”

Chapin added, “This seems in keeping with Digital Angel’s strategy of doing a lot of their business in the press, but to date they have not been able to back it up. They’ve been unable to produce the hardware.”

Following the announcement, shares of Digital Angel and Applied Digital rose 10 percent.

9-11 as marketing springboard

Applied Digital has always excelled at grandiose promotion, but especially since Sept. 11. One week after the multiple terror attacks, in a Sept. 19 press release, the company claimed it had offered its GPS-trackable Digital Angel wristwatches for free to both the U.S. Department of Transportation and the New York City Fire Department.

However, Transportation Security Administration spokesman Greg Warren told WND, “It’s against federal practices to receive anything for free. We’re not able to do it. As far as these GPS wristwatches go, I’ve not heard of them or of anyone using them. In fact, we’re not using any GPS wristwatches at all.” Department of Transportation spokesman Ben Langer echoed Warren’s comments.

Asked about seeming discrepancies in ADS statements, company spokesman Matthew Cossolotto told WorldNetDaily, “Here’s what I think happened. We offered to provide the devices, some discussions ensued but I do not believe any units were actually ever requested or delivered.”

Cossolotto had previously told USA Today that several Digital Angel units were rushed to New York City in the 9-11 aftermath.

Deirdre O’Sullivan, another spokesperson for the TSA, added that the agency is looking at a variety of security technologies, but that she had not heard of ADS or its products, and that the Department of Transportation had not spent any money on the products.

Did U.S. government weigh chip implant?

ADS has understandably regarded the post-9/11 security-conscious world as a lucrative market for its products. In a Feb. 26 article, “U.S. government to weigh computer chip implant,” the Associated Press reported that Applied Digital was “poised to ask the government to market a first-ever computer ID chip that could be embedded beneath a person’s skin.”

ADS recommended the implant “for airports, nuclear power plants and other high security facilities,” and that “the immediate benefits would be a closer-to-foolproof security system,” said the report.

But State Department spokesman Frederick Jones tells WND the idea of using implanted tracking chips on government personnel is “shocking.”

“I have not heard anything of that nature coming from the State Department,” he said. After conferring with superiors, Jones added: “We have no information about the experimentation of such technology in progress or the use of such chips by the State Department in any capacity.”

WND asked ADS spokesman Cossolotto which specific government entities had actually expressed interest in the company’s products, especially the human applications.

“It would be premature to provide any details about specific discussions or agencies that have expressed interest,” responded Cossolotto. “So answering that one will have to wait until we have something specific to release.”

ADS has frequently alluded in the press to interest by government entities for over two years.

Shareholder lawsuits claim fraud

Meanwhile, four shareholder class-action lawsuits have been filed by the law firms of Milberg Weiss; Glancy & Binkow; Schiffrin & Barroway; and Cauley Geller Bowman & Coates.

The suits allege defendant Applied Digital Solutions (and in some suits CEO Richard Sullivan) committed violations of federal securities law by the issuing of a series of “materially false and misleading statements to the market between February 11, 2000 and May 10, 2002.”

Among the allegations, the suits claim one subsidiary lacked proper accounting controls and another didn’t have proper revenue recognition practices in place. The company, according to the suits, failed to disclose the information to investors for more than two years.

In the Binkow case: “Plaintiff complains of a fraudulent scheme and deceptive course of business that injured purchasers of Applied Digital stock during the Class Period” and claims “Defendants’ failure to correct the false statements and public filings artificially inflated stock prices and acted as a fraud on the market.”

The lawsuits contend that purchasers of stock were injured by the disclosure that “no hospitals had accepted a scanner” for the VeriChip after ADS had claimed “nearly all the major hospitals in Palm Beach” would be equipped with the scanners. The suits refer to statements made in the Los Angeles Times and Miami Herald regarding the VeriChip.

One area hospital, Boca Raton Community Hospital, told WND hospital officials are waiting to see results of the FDA investigation into the company. “We’re still looking at confidentiality issues, and the timeliness of medical record updates,” said hospital spokesperson Betsy Whisman.

In a statement, ADS addressed the lawsuit issue: “Applied Digital expects that, as is common in these types of actions, other similar complaints will likely be filed and that all the complaints will eventually be consolidated into one action. Applied Digital believes the pending actions are without merit; it intends to vigorously defend against them; and it stands committed to remaining focused on its business plan.”

FDA investigation continues

Applied Digital’s problems don’t end there. The company is waiting out an ongoing investigation by the FDA into its implantable ID chip, the VeriChip, as to whether or not it should be classified as a medical device, thereby requiring that it first pass muster with the FDA.

As one indication of the conflict, ADS has altered the wording of an archived press release concerning the VeriChip, editing out verbal representations not allowed by the FDA.

“The agency is in the process of investigating the firm and documenting exactly what is being said, what is being printed, and what is being promoted,” Wally Pellerite, assistant to the director of the FDA Office of Compliance, told Tech TV. According to Pelletite, the FDA was “very clear” that ADS was free to go to market as long as no “medical information” of any kind was to be encoded on the chips, nor were the chips to link to any kind of medical database.

However, Pellerite said, Applied Digital Solutions issued statements saying that its chip had been given governmental approval and that the first implant would be scheduled for May 10.

When network television provided extensive coverage of the implantations, ADS executives publicly touted VeriChip’s lifesaving capability of providing medical information in emergencies, as they had on the days immediately preceding the event.

For example, in a demonstration after Florida resident Leslie Jacobs was implanted with the VeriChip, Applied Digital Solutions CTO Keith Bolton ran a scanner over her arm, which displayed not just an identification number, but her name, telephone number and a condition known as “mitral valve prolapse,” a heart murmur. This information could be helpful to medical professionals, said Bolton, “in the event that she can’t speak, to save her life.” And after Bolton scanned the newly “chipped’ arm of Leslie Jacobs’ 14-year-old son, Derek, the display revealed the boy’s medicine allergies.

“It would strongly suggest that [Applied Digital] has something that needs to be required to be regulated as a medical device,” Pellerite told TechTV. He added that Applied Digital may have violated the law when Bolton claimed, “There’s more information that can be pulled out of the FDA-compliant database.”

Pellerite explained: “The firm made reference to using an FDA-compliant [database]. It is a violation of the law to use the FDA in such a way that it would be used to endorse your particular product.”

The penalties for those violations range from up to $15,000 for each violation up to $1 million for the company, as well as for each individual officer of the company.

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