When Safecard Services Inc. was formed 25 years ago, no one could have foreseen how it would eventually dominate the credit card registration business.
Many of the biggest and most prestigious card issuers let Safecard sell their customers a hotline service for reporting lost and stolen cards.
The Cheyenne, Wyo., company still has a firm hold on that niche of the card business, but it has also become embroiled in a messy and expensive legal struggle with, of all people, Peter Halmos, the man who says he founded Safecard "with $500 and a typewriter."
Mr. Halmos' financial and personal grievances against Safecard, the numerous lawsuits and countersuits embodying them, and the associated gossip have turned the company into one of the curiosities of the credit card industry. And they pose a major challenge to the current management, headed by Paul G. Kahn, the former chief executive of AT&T Universal Card Services.
These are about the only clear-cut, uncontested facts of this murky affair of alleged betrayal and mismanagement, with accusations being hurled repeatedly among Mr. Halmos, his former management colleagues, and the corporation.
Mr. Halmos, who left the company in December 1992, has sued Safecard in four states. He basically accuses his former colleagues and directors of unfairly pushing him out and withholding stock options and other monetary obligations.
In turn, Safecard officials have alleged that Mr. Halmos abused his position at the company, misappropriating and misusing corporate funds and assets, among other misdeeds. Both sides seek multimilliondollar damage awards.
The differences between Mr. Halmos and his former colleagues began surfacing at least a couple of years before his resignation. Mr. Halmos declined to be interviewed for this article, but had a member of his camp speak on his behalf.
Records Seen at Risk
In 1990, this person said, Mr. Halmos decided that "an incompetent and corrupted management" was risking the safety of Safecard's records on more than 10 million cardholders. (The company says its subscribing customers are up to 13 million, from such issuers as Citibank, Household Bank, NationsBank, Sears, and J.C. Penney.)
Since 70% of the company's annual revenue stemmed from the credit card notification service, according to Mr. Halmos, the protection of account numbers, names, addresses, and other personal information is vital.
"We had become very concerned that Safecard's management was sloppy," the source said.
This carelessness, Mr. Halmos contends, led to the January 1991 theft of four million account numbers and customer names by a Safecard security guard. The information was recovered, but what he viewed as poor management of the incident proved to be a lasting sore spot between him and other executives.
Security at Issue
Mr. Halmos has maintained that Safecard should have done tighter background checks and taken more back-up security measures to protect its assets.
Jerry Cahill, a former chief operating officer of Safecard, dismissed Mr. Halmos' claims, saying the incident was "random" and not indicative of a deeper-seated security problem.
"Our security is excellent," said Mr. Cahill, who left the company in April along with several others from the "old guard" swept out by Mr. Kahn.
Mr. Cahill added that company security includes 24-hour guards at all entrances, card access systems, key pads, biometric identification systems, search cameras, and an extensive screening process for new employees.
These measures describe the company's headquarters in Wyoming, where Safecard had relocated in early 1991, shortly after - and according Mr. Halmos' representative, because of- the theft. Before that, the headquarters was in Fort Lauderdale, Fla. Mr. Kahn is closing the remaining operations there.
Boardroom Said to Be Bugged
More than a year and a half after the move to Cheyenne, the spokesman for Mr. Halmos said, a security consultant came in and uncovered monitoring equipment and bugging devices in the Safecard boardroom and other offices.
Mr. Halmos then realized we could move from Florida to Wyoming, or Wyoming to the moon - it wouldn't change anything," the spokesman said.
Three months later, the chief executive was gone.
Mr. Cahill denied the existence or discovery of any bugging devices.
Mr. Halmos' financial claims trace back even further, to 1988, when his source said he wanted to resign from Safecard and start new ventures.
He was reportedly persuaded by William Bacon, a Safecard board member, and another, undisclosed director to remain at the company and help "solve some of Safecard's problems." These included a Federal Trade Commission investigation, a stockholder lawsuit, and some operational issues.
Dispute Over Stock Options
In return, Mr. Halmos said, he was promised that he could cash in his $20 million in stock options when he left.
Kevin Forde, the principal attorney for Mr. Bacon, said his client had asked Mr. Halmos to stay and "provide services" to Safecard, but did not make any promises regarding the stock options. Mr. Bacon and the other board members and management maintained that those options expired as soon as Mr. Halmos left the company.
Mr. Forde said it was Mr. Halmos' desire to focus on starting other companies, which slowly pulled him away from Safecard's management team. Thus, he said, Mr. Halmos was not "forced out," as Mr. Halmos is asserting.
In their countersuit, Safecard alleges that Mr. Halmos was making insider trades based on knowledge about a major company account. Court briefs say Mr. Halmos had prior knowledge that the company was to lose a contract with American Express Co. in September 1987, and sold off much of his stock before the news became public and the price began to slide.
Mr. Halmos said that those allegations are false and that he made his last stock sale almost a year before the American Express cancellation.
Housecleaning in Top Ranks
Many of the Safecard executives named in Mr. Halmos' suits left the company in the recent housecleaning by Mr. Kahn, who took the top job last year, saying he would turn Safecard into a broader provider of credit card enhancement services.
"I think Peter fouled his nest when he was CEO," Mr. Kahn said in an interview soon after his appointment. "I think he took advantage of some situations."
Mr. Kahn's recent dismissal of eight management holdovers and his recasting of the company mission shifted some of the focus away from the litigation. But the money spent on legal costs has cut a wide swath into earnings.
Legal fees for Safecard's first fiscal quarter, ending Jan. 31, reached $2.6 million, up from $400,000 the year before. Net income was down by $500,000, to $8.4 million, and would have declined another $2 million if not for a one-time tax credit.
Aside from waging the legal battles, the opposing sides are engaged in high-profile public relations campaigns. Safecard director Robert Dilenschneider and his Dilenschneider Group are on the company's side, and Robert Siegfried of Kekst & Co., a New York firm known for its role in corporate takeover battles, represents Mr. Halmos.
Experts say the expense burdens - compounded by $3.5 million in the current quarter to cover severance pay and closing the Fort Lauderdale office - has been taking a toll on Safecard operations.
"It's very expensive," Peter Russ, who follows Safecard for the New York brokerage firm Shelby, Cullom, Davis & Co., said of the litigation. "Everybody [eventually] goes broke."
It doesn't help matters, according to Mr. Russ, that the company's broader strategic direction, diversifying beyond credit card registration, seems to involve lower-margin businesses.
"They're jeopardizing a business of earning $10 to possibly make $2," Mr. Russ said.
The continuing legal battles between Mr. Halmos and his former company do not seem to hold out any easy compromises. Each side appears to be holding to its respective position, and neither seems willing to lose face with a financial settlement.
"Peter Halmos is young and he's got $50 million," Mr. Russ said. "He wants to be vindicated and he's not going to stop."
Founder and former chairman of Safecard Services Inc. Suing his former company for $20 million in stock options and other financial recompense. Current suit pending in Wyoming State Court for Sherman Antitrust Act violations, breach of contract, and other claims. He plans to amend a recently dismissed claim in Illinois.
Brother of Peter Halmos and former Safecard executive Accused by Peter Halmos of taking a bribe from Safecard to side against Peter.
CURRENT POWER HOLDERS
PAUL G. KAHN
Chairman and chief executive officer since December 1993 Replaced the entire managenment team he inherited and set objectives of faster growth and diversification.
Public relations executive, formerly of Hill & Knowlton, and a Safecard board member His company, the Dilenschneider Group, handles public relations for Safecard. Has been sued by Peter Halmos in New York State Supreme Court for fraud.
A Safecard board member
Accused of reneging on financial obligations to Peter Halmos. (Veteran Safecard managers pushed out in April)
THE GANG OF EIGHT
* GERALD CAHILL
Chief operating officer Sued by Peter Halmos in Florida for implicating Safecard in tax evasion.
* BARRY TILLIS Assistant general counsel Sued by Peter Halmos for attorney malpractice, breach of contract, breach of fiduciary trust, unjust enrichment. Mr. Tillis is suing Safecard for breach of contract, breach of good faith, and intentional infliction of emotional distress.
* W.M. STALCUP JR. President
* JOHN BOCHAK senior executive vice president of operations
* JOANNE SEEHOUSE Executive vice president of sales
* AGNETA BRESLIN Executive vice president and assistant secretary
* DAVID GALLIMORE Executive vice president of marketing
* TIMOTHY QUINLAN Sales manager