Irving-based firm's device, stock trades under scrutinyBomb detector flunked tests; Navy still bought it
01:02 AM CDT on Monday, April 16, 2007
The Irving marketers behind Sniffex – which looks like a cross between a large cigarette lighter and a TV antenna – say the device can pinpoint explosives from a football field away.
Illustration: The Sniffex device (.pdf)
But in a test by the U.S. Navy, Sniffex didn't register when two trucks passed within 20 feet, hauling a half ton of explosives. The testers said the antenna was "extremely susceptible" to a phenomenon that has also been linked to Ouija boards.
That didn't stop another part of the Defense Department from buying eight of them – for nearly $50,000.
The military initially said it was "ripped off" but later said it was reviewing the purchase. And now, the Securities and Exchange Commission is investigating Sniffex Inc. for possible stock trading violations.
Sniffex also used many of the same business associates as other companies named in another SEC investigation into a Dallas-based penny stock network. The agency says in court documents that the network may have fleeced investors of millions of dollars with junk faxes and spam about multiple stocks.
Paul B. Johnson, chief executive officer of Sniffex, recently renamed Homeland Safety International Inc., said his product does work and that the Navy test was an anomaly. He denied any involvement in the spamming and said he doesn't know what the SEC is after.
"My company has never paid for any promotion except standard PR," he said. "Any time a stock goes up and down pretty fast and someone thinks that someone is doing something, there's an inquiry."
The publicly traded Irving company might be small, but it represents two broad trends – the rush to capitalize on the post-9/11 security market and the wave of penny stock promotions that floods fax machines and e-mail inboxes every day.
The Sniffex detector, invented in Bulgaria, is supposed to work by detecting the "interference between the magnetic field of the earth, the explosive, the device itself and the human body." When it does, an antenna should rotate in the direction of the explosives.
Shortly after the London subway bombings in July 2005, the Navy's counterterrorism technology task force tested Sniffex.
The team found that the device was correct only 23 percent of the time and "performed no better than random chance."
"The Sniffex handheld explosives detector does not work," the report concluded. "There was absolutely no indication the device met any single vendor claim."
The Navy testers said the antenna was prone to moving for slight breezes, nearby magnets and unconscious muscular movements, known as the ideomotor effect – the same phenomenon that some believe occurs with Ouija boards.
The report said Sniffex had no power source capable of emitting a signal and was composed of few parts – the body, several magnets and the antenna.
Mr. Johnson admits the test didn't go very well.
"It was an utter failure. There's no question about it," he said. "You can imagine the CEO out in the middle of 105 degrees and nothing is working. You're embarrassed as hell and you can't figure out what's going wrong."
Mr. Johnson said Sniffex failed because the Yuma Proving Ground in Arizona, where the test was conducted, is saturated with explosives residue, which confused the device. Sniffex is intended to work in more sterile environments, such as airports and sea ports, he said.
He initially agreed to give The Dallas Morning News a demonstration of Sniffex, but his lawyer canceled a few hours later.
Mr. Johnson added that the device has passed other tests, including one at the New Mexico Institute of Mining and Technology. Officials there wouldn't comment on Sniffex.
More than 800 devices have been sold outside the U.S., including to government agencies in Estonia, Turkey, Russia and the Middle East, Mr. Johnson said.
"The results of the device's functioning are very good," a Bulgarian Ministry of Interior official wrote in a letter provided by Mr. Johnson. "Our statistics show the percent of accurate indications for the presence of explosives and ammunitions exceeds 90 percent."
Even the Navy bought it despite its own tests.
According to the contract, the military's Special Operations Command Pacific near Pearl Harbor – which relies on the Navy for contracting – purchased eight Sniffex devices on Jan. 30 for $48,095.65.
The command wouldn't disclose why they bought the device or whether they were aware of the negative report, citing security reasons. But after inquiries from The News, a spokeswoman for the command said that Sniffex was not what it appeared to be.
"I can tell you that we purchased it in good faith," said Lt. Col. Jacquelin Lyons. "And we got ripped off."
She later said she was only speculating and her comment wasn't accurate. She said the official response is that the military is "reviewing the purchase."
James Randi, who runs a Web site dedicated to debunking the paranormal, said it was ridiculous that the military would purchase the product. "You'd think that the Navy would have issued some sort of warning or alert," he said.
Mr. Randi offered Mr. Johnson a $1 million prize if Sniffex worked and wrote about the challenge on his Web site, randi.org. Sniffex appears to be nothing more than a divining rod, which inventors for years have claimed could detect anything from water to gold to missing children, he said.
Mr. Johnson didn't accept Mr. Randi's offer and sued him for libel. Mr. Johnson eventually dropped the suit.
Sniffex has also drawn scrutiny from the SEC. After the London bombings, junk faxes and spam went out across the country, predicting that the company's stock price would skyrocket from $2 to $20.
The price did rise from $2.23 to $5.65 in three weeks. But four days later, it dropped back to $2.61, and in a year's time, it was down to 35 cents.
In SEC documents from July 2005, the agency says Mr. Johnson or others may have "employed devices, schemes or artifices to defraud" and "obtained money or property by means of untrue statements of material facts." The SEC also raised questions about the New Mexico institute's test.
In a subpoena to a Dallas brokerage, the SEC's regional office in Fort Worth requested the trading records of Sniffex's principals and major shareholders.
Mr. Johnson denied the allegations.
"This company has never and will never spend a single dime on illegal spamming or marketing activities, even though someone, not affiliated with the company, is doing so and stating in their disclaimer that they were paid by Sniffex Inc.," he wrote in a letter to shareholders. "THIS IS FLATLY NOT TRUE."
SEC officials declined to comment. They cautioned that inquiries don't always lead to legal proceedings and that subpoenas don't mean that the people named in them have broken any laws.
A business developer who built a successful educational software company in the 1990s and lost lots of money in the dot-com bust, Mr. Johnson once lived in one of the most expensive houses in Tarrant County – a $7 million French chateau replica in Colleyville. But he has faced SEC scrutiny before. In 2003, the SEC opened an investigation into his chain of home-entertainment stores, Lifestyle Innovations Inc.
The agency said in court documents that it suspected two investors, Tulsa lawyer G. David Gordon and former Irving broker Doyle Mark White, had secretly acquired control of Lifestyle, fraudulently manipulated its stock price and illegally sold their shares into the public market.
The inquiry into Lifestyle hasn't resulted in any penalties by the SEC.
Mr. Gordon said the problem was simply a paperwork mistake. Mr. White said some investors complained to the SEC after he had stopped the investors from illegally shorting the stock. Mr. Johnson said he and others involved lost money in the company.
As for Sniffex, the SEC hasn't taken any legal action.
According to the company's 2006 annual report, the firm generated revenue of more than $424,000, but posted a net loss of more than $653,000. Its combined loss for 2005 and 2006 was more than $1 million. Mr. Johnson said that's good for a startup trying to bring new technology to the market.
"It's not $6 million. It's not $12 million. It's not $16 million," he said. "Most things that we're working on right now are much larger."
The company sells other products such as a radiation detection system, a GPS tracking device and a flashlight that doubles as a video camera.
The company's stock now trades at 2.4 cents a share.