Sunrise Tech Takes Critics to Court

The surgical laser company is alleging defamation after two research firms issued sharply critical reports.
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You might think that developing a product, trying to get it approved and then selling it would be enough. But

Sunrise Technologies

(SNRS)

apparently wants its pound of flesh, too.

The company doesn't like what some people on Wall Street have been saying about it, so it's taking them to court. Last week, it filed to get an emergency injunction and restraining order against

Sturza's Institutional Research

and

Avalon Research

, two boutique firms that have written sharply critical research reports on the surgical laser company. It wanted to have them immediately stop writing about the company and sharing their investment opinions with clients. That was thrown out by a judge in Northern California District Court Friday.

Despite its lack of success in court so far, Sunrise isn't giving up. Late last week, it sued both firms for defamation as well.

The aggressive legal actions illustrate the lengths some companies will go to shut up critics. Increasingly companies are seeking to identify and pursue critics, whether on Wall Street or on Internet message boards. Even if a suit is groundless, legal action can cost thousands of dollars in legal fees and be a time-consuming distraction.

"Litigation as a form of attacking adverse analysis is not entirely new.

But I think it's quite rare. The concern a public company has is that you draw more attention to the thesis being expounded," says Karl Groskaufmanis, a securities lawyer and partner at

Fried Frank Harris Shriver & Jacobson

, which isn't involved in the case. "If what's being issued is purely opinion, my own view is that it's not productive to go suing analysts. The best antidote to a research report you don't like is to perform well and prove them wrong."

Sunrise is a Fremont, Calif., company that's developing a surgical laser for farsightedness. As the company comes up for a

Food and Drug Administration

advisory panel meeting Thursday, it has caught the attention of short-sellers who think even if the FDA approves its technology, Sunrise is unlikely to be successful on the market. While Sunrise's stock has done extraordinarily well this year (up 180%), over the last several days, it has weakened. The stock climbed 1 5/16 to 17 7/8 Monday.

TheStreet.com

has taken a look at its prospects in a couple of earlier

stories.

Neither Sunrise nor its law firms, Chicago-based

Holleb & Coff

and San Francisco's

Duane Morris & Hecksher

, returned calls seeking comment. On Thursday, Holleb & Coff lawyer Howard Hoffmann said he would get back to

TheStreet.com

with extensive comments, but didn't. He did say: "We resent the manipulation of the stock through issuing reports and then taking major positions in the stock. Tell me that's not a crime."

Evan Sturza, who heads Sturza's Institutional Research, and Avalon declined to comment on the lawsuits or on the firms' current positions in Sunrise. Both firms have investment arms that can take trading positions, long and short.

Steven Frankel, of

Frankel Rudder & Lowery

, who represents Sturza's, says the suits are meant to quiet the critics: "There's no question, in my opinion, that they are trying to back Evan and Avalon off and turn the tables."

Another element of the case is that several partners at Holleb & Coff have ownership stakes in Sunrise Technologies, according to a June 16 filing with the

Securities and Exchange Commission

. The filing, an amendment to a secondary offering document, reads: "We would call your attention to the fact that Eric M. Fogel, a partner of this law firm, also acts as the secretary of the company and certain of our firm's partners, including Mr. Fogel, own shares of the company's common stock."

Holleb & Coff lawyer Hoffmann didn't respond to an extensive email inquiry to discuss the issue.

Says Fried Frank's Groskaufmanis: "Particularly in high-tech and development stage companies, the practice of giving stock for fees is by no means unprecedented and it seems to be becoming more common. It can create a conflict of interest, which is why it's disclosed." A potential benefit, he says, is that such compensation can align the lawyers' and the client's desires better.

Potential conflicts of interest notwithstanding, Frankel doesn't think the suits have a chance: "I don't see it at all. The First Amendment says that if you say something and, if on a good-faith basis, you believe what you're saying, you're covered."