Diebold Unravels
THE BUSINESS OF VOTING
New York Times
December 18, 2005
http://www.nytimes.com/2005/12/18/opinion/18sun2.html
Diebold, the controversial electronic voting machine manufacturer, is coming off a tumultuous week. Its chief executive, Walden O'Dell, resigned. It was hit with a pair of class-action lawsuits charging insider trading and misrepresentation, and a county in Florida concluded that Diebold's voting machines could be hacked. The company should use Mr. O'Dell's departure to reassess its flawed approach to its business. The counting of votes is a public trust. Diebold, whose machines count many votes, has never acted as if it understood this.
Mr. O'Dell made national headlines when he wrote a fund-raising letter before the 2004 election expressing his commitment to help deliver the electoral votes of Ohio -- where Diebold is based, and where its machines are used -- to President Bush. Under pressure, Diebold barred its top officials from contributing to campaigns. But this month, The Plain Dealer in Cleveland reported that three executives not covered by the ban continued to make contributions to Republican candidates.
Diebold's voting machines have a troubled history. The company was accused of installing improperly certified software, which is illegal, in a 2002 governor's race in Georgia. Across the country, it reached a multimillion-dollar settlement with the California attorney general last year of a lawsuit alleging that it made false claims about the security of its machines. Last week, the top elections officer in Leon County, Fla., which includes Tallahassee, concluded after a test that Diebold machines can be hacked to change vote totals.
Diebold has always insisted that its electronic voting machines are so reliable that there is no need for paper records of votes that can be independently verified. Fortunately, the American people feel otherwise. Nearly half the states -- including large ones like California, New York, Illinois and Ohio -- now require so-called paper trails.
Paper trails are important, but they are no substitute for voting machine manufacturers of unquestioned integrity. As Diebold enters the post-O'Dell era, it should work to make itself worthy of the important role it now plays in American democracy.
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COUNTY SAYS ELECTRONIC VOTING MACHINES CAN BE HACKED Associated Press December 15, 2005
http://www.usatoday.com/news/nation/2005-12-15-opticalvoting_x.htm
TALLAHASSEE, Fla. - Tests on an optical-scan voting system used around the country showed it is vulnerable to hacking that can change the outcome of races without leaving evidence of fraud, a county election supervisor said. The voting system maker, Diebold Inc., sent a letter in response that questioned the test results and said the test was "a very foolish and irresponsible act" that may violated licensing agreements.
Company spokesman David Bear did not return a phone call from The Associated Press seeking comment Thursday. Diebold's letter was written by its senior lawyer, Michael Lindroos, and sent to the state of Florida, Leon County and the county election supervisor, Ion Sancho.
Optical-scan machines use paper ballots where voters fill in bubbles to mark their candidates. The ballots are then fed into scanners that record the selections.
In one of the tests conducted for Sancho and the non-profit election-monitoring group BlackBoxVoting.org, the researchers were able to get into the system easily, make the loser the winner and leave without a trace, said Herbert Thompson, who conducted the test.
He also said the machine that tabulates the overall count asked for a user name and password, but didn't require it.
In the other test, the researcher who had hacked into the voting machine's memory card was able to hide votes, make losers out of winners and leave no trace of the changes, said BlackBox founder Bev Harris. The memory card records the votes of one machine, then is taken to a central location where results are totaled.
Sancho criticized the Florida Secretary of State's Office, which approves the voting systems used in the state, for not catching the alleged problems.
A spokeswoman for the secretary of state's office said any faults Sancho found were between him and Diebold.
"If Ion Sancho has security concerns with his system, he needs to discuss them with Diebold," spokeswoman Jenny Nash said.
The Miami Herald reported Thursday that Sancho scraped Leon's Diebold machines this week for a voting system from another manufacturer.
Many Florida counties switched to computer-based elections systems after the 2000 presidential election, when the cardboard punchcard ballots then in use were plagued by incomplete and multiple punches.
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EXCLUSIVE: SECURITIES FRAUD LITIGATION FILED AGAINST DIEBOLD, INC!
EIGHT CURRENT AND FORMER EXECUTIVES NAMED AS CO-DEFENDANTS, INCLUDING FORMER CEO O'DELL AND NEW CEO SWIDARSKI
CLASS ACTION SUIT ALLEGES FRAUD, INSIDER TRADING, MANIPULATION OF STOCK PRICES, CONCEALMENT OF KNOWN FLAWS IN VOTING MACHINES AND COMPANY STRUCTURAL PROBLEMS
By Brad Freidman BradBlog December 13, 2005
http://www.bradblog.com/archives/00002153.htm
The BRAD BLOG can now report that a Securities Fraud Class Action suit has been filed against Diebold, Inc. naming eight top executive officers in the company as co-defendants. The suit has been filed by plaintiff Janice Konkol, alleging securities fraud against the North Canton, Ohio-based manufacturer of Voting Systems and ATM machines on behalf of investors who owned shares of Diebold stock and lost money due to an alleged fraudulent scheme by the company and its executives to deceive shareholders during the "class period" of October 22, 2003 through September 21, 2005.
The suit was filed today in U.S. Federal District Court in Ohio and alleges the company "artificially inflated" stock prices through misleading public information designed to conceal the true nature of Diebold's financial and legal situation. The defendants are also alleged to have attempted to disguise well-known and ongoing problems with Diebold's Voting Machine equipment and software. Additionally, the suit alleges insider trading by defendants resulting in proceeds of $2.7 million. Remedies are sought under the Securities Exchange Act of 1934.
The suit, filed by the law firm Scott+Scott, LLC on behalf of Konkol and the plaintiff class, names former Diebold CEO and Chairman, Walden O'Dell as a co-defendant along with seven other current and former officers of the once-venerable company.
News of the pending litigation was first reported as imminent in an exclusive report by The BRAD BLOG late last week.
Yesterday, in a surprise announcement, O'Dell unexpectedly resigned from the company. A Diebold press release described O'Dell as leaving the company for "personal reasons". He was immediately replaced by the company's president and chief operating officer, Thomas W. Swidarski, who had directly overseen Diebold's Election Systems subsidiary division for some time. Swidarski is also named as a co-defendant in today's class action suit.
After news was released of weaker-than-expected third-quarter earnings on September 21, Diebold stock prices plummeted 15.5% in unusually heavy trading that resulted in a one day sell-off costing investors more than $40 million dollars. The complaint describes Diebold and the co-defendants as having "failed to disclose adverse facts known" to the company and that they "participated in a fraudulent scheme and course of business that operated as a fraud."
The suit, to be released in full by The BRAD BLOG shortly, (UPDATE: Full suit now available for download here) alleges Diebold and the eight co-defendants failed to alert investors to adverse facts known to the company, choosing instead to participate in a "fraudulent scheme and course of business" that operated as a fraud or deceit on the company's shareholders.
The suit describes the liabilities of the company and co-defendants as follows:
"Each defendant is liable for (a) making false statements, or (b) failing to disclose adverse facts known to him about Diebold. Defendants¹ fraudulent scheme and course of business that operated as a fraud or deceit on purchasers of Diebold publicly traded securities was a success, as it (a) deceived the investing public regarding Diebold¹s prospects and business;
(b) artificially inflated the prices of Diebold¹s publicly traded securities; (c) allowed insiders to sell over 51,000 shares of Diebold stock, for proceeds of $2.7 million; and (d) caused plaintiff and other members of the Class to purchase Diebold¹s publicly traded securities at inflated prices."
THE DEFENDANTS
Named as co-defendants in the suit along with former CEO O'Dell and new CEO Swidarski are President of International Operations, Michael J. Hillock; Senior Vice President of Customer Solutions, David Bucci; Interim Chief Financial Officer, Principal Accounting Officer and Controller, Kevin J. Krakora; Vice President and Chief Information Officer, John M. Crowther; Senior Vice President and CFO, Gregory T. Geswein; and President and COO, Eric C. Evans. (Titles applied to the named co-defendants during the class period. Evans, for example resigned from the company on the same day as the Sep. 21, 2005 announcement.) "Each individual defendant," the suit points out, "owed a duty to the Company and its shareholders not to trade on inside information."
The claim cites a number of allegedly misleading news releases pertaining to the fitness and security of election systems as contracted by Diebold in San Diego County in 2003; their settlement for $2.6 million with the state of California in 2004, wherein Diebold is alleged to have concealed "the dimensions and scope of internal problems at the Company" from investors; and an "astonishingly low and incredibly inaccurate" statement about "restructuring charges" in the Sep. 21 announcement.
Once again, quoting from the lawsuit:
"During the Class Period, defendants knew and concealed that:
"(a) the Company remained unable to assure the quality and working order of their voting machine products;
"(b) the Company lacked a credible state of internal controls and corporate compliance;
"(c) the 2004 settlement with the State of California served to conceal from investors the dimensions and scope of internal problems at the Company, impacting product quality, strategic planning, forecasting, guidance, internal controls and corporate compliance; and
"(d) the Company¹s "prediction" of astonishingly low and incredibly inaccurate restructuring charges for the entire 2005 fiscal year grossly understated the true costs defendants faced to restructure the Company.
The complaint alleges that the company lied to investors about the true costs of its restructuring activities, concealing the fact that Diebold was facing far worse restructuring issues than publicly represented -- indicative of far greater problems than the company was willing to reveal.
For example, the complaint indicates that the problems Diebold faced in California in 2004 were merely the tip of an internal structural iceberg which the company had sought to conceal from investors when they decided to make a settlement in the case. Investors could not know then that the problems revealed by the California litigation in 2004 were a sign of more and deeper internal problems to come. The settlement agreed to by Diebold in that case, the suit alleges, was meant to keep a lid on the larger dimensions of the problems, rather than indicating that the issues at stake had been fully resolved. Press materials released by the company announcing the settlement -- and included in the version of the complaint filed today -- seem to indicate otherwise to investors.
...THE INSIDER...
Additional facets of the company's internal structural problems were revealed in a series of previous BRAD BLOG articles reporting on an anonymous company insider we dubbed "DIEB-THROAT" who alerted us to the "Cyber Alert Warning" issued by a branch of the Dept. of Homeland Security in August of 2004. That warning concerned the vulnerability to hackers of Diebold's central vote tabulating software prior to last year's Presidential Election. The election watchdog organization BlackBoxVoting.org, who had first discovered the vulnerability, had also recently arranged for a computer security expert to successfully hack into actual Diebold voting machines used in Leon County, Florida without leaving any trace of the manipulation.
It was just several days after our first report on DIEB-THROAT that stock prices plunged at the company in September. Diebold attempted to blame their troubles, at the time, on bad weather in the gulf which lead our insider source to aver: "Using Hurricane Katrina is a poor excuse for bad products -- the last time this kind of deception occurred it was called Enron."
Internet news site, The RAW STORY recently ran their own interview with DIEB-THROAT revealing still more structural problems within the company and its voting division. The report explained that the company was "plagued by technical woes," even as a Diebold spokesperson claimed the 144-year old company "has a sterling reputation in the industry."
...THE PLAINTIFF...
Plaintiff Konkol, a just-retired 29-year public school employee from Central Wisconsin first invested in Diebold in 1999. She told The BRAD BLOG that she purchased the stock thinking, "ATM's that'd be the way to go." She originally invested $500 which eventually grew to $1400 before falling. She is also invested in Diebold via mutual funds held by the Wisconsin Education Union in which she is a member. Konkol, a 56-year old grandmother of three, recently returned from two weeks of volunteering on the Gulf Coast with several members of her Lutheran church. "We got a big group together and we went down to the Gulf to help out in Katrina."
"I believe in churches...I believe we should practice what we're preached to about," she told us. "I don't like it when big companies take advantage of us little people," she said. "I can't say that I'm anti-big business...I just want things to be fair."
It appears that Scott+Scott, the attorneys associated with the case, are just beginning to learn about the full scope of the fraud allegedly perpetrated by Diebold on investors. Amended complaints with additional details are expected to be filed in the weeks and months to come. Other law firms are also expected to file similar suits which will eventually be consolidated by the Federal District Court hearing the case. Indeed The BRAD BLOG has been contacted since filing our original report on this last week, by other firms who are said to be pursuing similar litigation against Diebold.
...THE REFORMERS...
As one of America's largest Voting Machine Companies (along with ES&S, they account for the tabulation of more than 80% of America's votes every election) Diebold has been the target of Election Reform advocates for their strong partisan support of Republican causes and candidates, a statement made prior to last year's Presidential Election to Republican fundraisers by O'Dell that he was committed to "delivering the state of Ohio" to George W. Bush, along with their reluctance to include verifiable paper ballots with their voting products and to make the source-code for their software open and available for public inspection.
A recent 100+ page GAO report, shamefully unreported by the mainstream media, confirmed many of the Election Reform advocates concerns about the security and vulnerability of Voting Equipment made by Diebold and other such companies. In California, a recent mock election test revealed that some 20% of Diebold touch-screen voting machines failed to operate as expected after being previous decertified for similar failures and vulnerabilities. Despite that, California's Republican Sec. of State Bruce McPherson remarkably is considering re-certifying those same machines in the state which Diebold has described as America's "largest voting market."
Diebold was one of seven major American Voting Machine companies named in Velvet Revolution's "Divestiture for Democracy" campaign launched on Presidents' Day last February. The campaign demanded accountability and openness by the Voting Machine Companies in what Velvet Revolution deemed a "patriotic duty" to "ensure free, fair and transparent elections" by the private companies entrusted with running our sacred public democracy. The BRAD BLOG is a co-founder of VelvetRevolution.us.
Konkol's complaint as filed today demands "a trial by jury."
The BRAD BLOG will of course, compile an extensive, accurate and verifiable paper trail in regards to this story as it continues to unfold...
UPDATE: Scott+Scott, LLC releases news of the case filing in a press release here:
http://biz.yahoo.com/prnews/051213/netu036.html?.v=32
FURTHER UPDATE: Reuters picks up the story http://tinyurl.com/7g4xz . Unable to get comment from Diebold.
UPDATE 12/14/05: A full copy of the complaint is now available for download here: http://www.bradblog.com/archives/00002158.htm
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DEVASTATING HACK PROVEN - LEON COUNTY DUMPS DIEBOLD Black Box Voting December 13, 2005 Updated December 16, 2005
http://www.bbvforums.org/cgi-bin/forums/board-auth.cgi?file=/1954/15595.html
Volusia County (FL) joins Leon in dumping Diebold. Due to contractual non-performance and security design issues, Leon County (Florida) supervisor of elections Ion Sancho has announced that he will never again use Diebold in an election. He has requested funds to replace the Diebold system from the county. On Tuesday, the most serious ³hack² demonstration to date took place in Leon County. The Diebold machines succumbed quickly to alteration of the votes. This comes on the heels of the resignation of Diebold CEO Wally O'Dell, and the announcement that stockholder's class action suits and related actions have been filed against Diebold by four separate law firms. Further ³hack² testing on additional vulnerabilities is tentatively scheduled before Christmas in the state of California.
Finnish security expert Harri Hursti, together with Black Box Voting, demonstrated that Diebold made misrepresentations to Secretaries of State across the nation when Diebold claimed votes could not be changed on the ³memory card² (the credit-card-sized ballot box used by computerized voting machines.
A test election was run in Leon County on Tuesday with a total of eight ballots. Six ballots voted "no" on a ballot question as to whether Diebold voting machines can be hacked or not. Two ballots, cast by Dr. Herbert Thompson and by Harri Hursti voted "yes" indicating a belief that the Diebold machines could be hacked.
At the beginning of the test election the memory card programmed by Harri Hursti was inserted into an Optical Scan Diebold voting machine. A "zero report" was run indicating zero votes on the memory card. In fact, however, Hursti had pre-loaded the memory card with plus and minus votes.
The eight ballots were run through the optical scan machine. The standard Diebold-supplied "ender card" was run through as is normal procedure ending the election. A results tape was run from the voting machine.
Correct results should have been: Yes:2 ; No:6
However, just as Hursti had planned, the results tape read: Yes:7 ; No:1
The results were then uploaded from the optical scan voting machine into the GEMS central tabulator, a step cited by Diebold as a protection against memory card hacking. The central tabulator is the "mother ship" that pulls in all votes from voting machines. However, the GEMS central tabulator failed to notice that the voting machines had been hacked. The results in the central tabulator read:
Yes:7 ; No:1
This videotaped testing session was witnessed by Black Box Voting investigators Bev Harris and Kathleen Wynne, Florida Fair Elections Coalition Director Susan Pynchon, security expert Dr. Herbert Thompson, and Susan Bernecker, a former candidate for New Orleans city council who videotaped Sequoia-brand touch-screen voting machines in her district recording vote after vote for the wrong candidate.
The Hursti Hack requires a moderate level of inside access. It is, however, accomplished without being given any password and with the same level of access given thousands of poll workers across the USA. It is a particularly dangerous exploit, because it changes votes in a one-step process that will not be detected in any normal canvassing procedure, it requires only a single a credit-card sized memory card, any single individual with access to the memory cards can do it, and it requires only a small piece of equipment which can be purchased off the Internet for a few hundred dollars.
One thousand two hundred locations in the U.S. and Canada use Diebold voting machines. In each of these locations, typically three people have a high level of inside access. Temporary employees also often have brief access to loose memory cards as machines are being prepared for elections. Poll workers sometimes have a very high level of inside access. National elections utilize up to two million poll workers, with hundreds or thousands in a single jurisdiction.
Many locations in the U.S. ask poll workers to take voting machines home with them with the memory cards inside. San Diego County (Calif) sent 713 voting machines/memory cards home with poll workers for its July 26 election, and King County (Wash.) sent over 500 voting machines home with poll workers before its Nov. 8 election.
Memory cards are held in a compartment protected by a small plastic seal. However, these simple seals can be defeated, and Hursti has found evidence that the memory card can be reprogrammed without disturbing the seal by using a telephone modem port on the back of the machine.
The Hursti Hack, referred to as ³the mother of all security holes² was first exposed in a formal report on July 4:
http://www.blackboxvoting.org/BBVreport.pdf
Diebold has insisted to county and state election officials that despite Hursti¹s demonstration, changing votes on its memory cards is impossible. (Public records from Diebold, including threat letter to Ion Sancho:
http://www.bbvforums.org/forums/messages/2197/10535.html )
On Oct. 17, 2005 Diebold Elections Systems Research and Development chief Pat Green specifically told the Cuyahoga County (Ohio) board of elections during a $21 million purchasing session that votes cannot be changed using only a memory card. (Video of Pat Green:
http://www.bbvforums.org/forums/messages/2197/14298.html ) Over the objections of Cuyahoga County citizens, and relying on the veracity of Diebold¹s statements, the board has chosen to purchase the machines.
According to Public Records obtained by Black Box Voting, Diebold has promulgated misrepresentations about both the Hursti Hack and another kind of hack by Dr. Herbert Thompson to secretaries of state, and to as many as 800 state and local elections officials.
Stockholder suit filed by the law offices of Stull, Stull & Brady and also by Scott and Scott.
Stull Stull & Brady lawsuit:
http://www.bbvforums.org/cgi-bin/forums/board-auth.cgi?file=/8/15603.html
and:
http://www.bradblog.com/archives/00002153.htm
Diebold CEO resigns:
http://www.informationweek.com/news/showArticle.jhtml?articleID=175001748
............
VOLUSIA COUNTY DUMPS DIEBOLD TOO Orlando Sentinel
DELAND -- Diebold voting machines will soon be history in Volusia County. After a nearly five-hour hearing today, County Council members voted to replace its Diebold machines with an entirely new system manufactured by Election Systems & Software.
The move, which will cost more than $2.5 million just for the equipment, was prompted by a federal mandate to buy at least one handicapped-accessible voting machine per precinct by Jan. 1. But the only such devices approved for use in Florida are ATM-like touch-screen machines that don't use paper ballots. But a majority of County Council members want devices that use paper.
The agreement approved Friday on a 4-3 vote allows the county to trade in the paperless touch screens for an ES&S-supported ballot-marking device with an accessible touch-screen called AutoMark if it gets approved for use in Florida. That would cost an additional $150,000.
If AutoMark certification doesn't happen by April 1, the county has the option to get out of the entire contract with ES&S and get a full refund.
Chairman Frank Bruno, Art Giles, Carl Persis and Dwight Lewis voted for the ES&S contract. Council members Joie Alexander, Bill Long and Dwight Lewis opposed it.
The vote ends a nearly year-old debate in Volusia County about how to comply with the federal Help America Vote Act, which mandates accessible voting devices.
Informant: NHNE
New York Times
December 18, 2005
http://www.nytimes.com/2005/12/18/opinion/18sun2.html
Diebold, the controversial electronic voting machine manufacturer, is coming off a tumultuous week. Its chief executive, Walden O'Dell, resigned. It was hit with a pair of class-action lawsuits charging insider trading and misrepresentation, and a county in Florida concluded that Diebold's voting machines could be hacked. The company should use Mr. O'Dell's departure to reassess its flawed approach to its business. The counting of votes is a public trust. Diebold, whose machines count many votes, has never acted as if it understood this.
Mr. O'Dell made national headlines when he wrote a fund-raising letter before the 2004 election expressing his commitment to help deliver the electoral votes of Ohio -- where Diebold is based, and where its machines are used -- to President Bush. Under pressure, Diebold barred its top officials from contributing to campaigns. But this month, The Plain Dealer in Cleveland reported that three executives not covered by the ban continued to make contributions to Republican candidates.
Diebold's voting machines have a troubled history. The company was accused of installing improperly certified software, which is illegal, in a 2002 governor's race in Georgia. Across the country, it reached a multimillion-dollar settlement with the California attorney general last year of a lawsuit alleging that it made false claims about the security of its machines. Last week, the top elections officer in Leon County, Fla., which includes Tallahassee, concluded after a test that Diebold machines can be hacked to change vote totals.
Diebold has always insisted that its electronic voting machines are so reliable that there is no need for paper records of votes that can be independently verified. Fortunately, the American people feel otherwise. Nearly half the states -- including large ones like California, New York, Illinois and Ohio -- now require so-called paper trails.
Paper trails are important, but they are no substitute for voting machine manufacturers of unquestioned integrity. As Diebold enters the post-O'Dell era, it should work to make itself worthy of the important role it now plays in American democracy.
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COUNTY SAYS ELECTRONIC VOTING MACHINES CAN BE HACKED Associated Press December 15, 2005
http://www.usatoday.com/news/nation/2005-12-15-opticalvoting_x.htm
TALLAHASSEE, Fla. - Tests on an optical-scan voting system used around the country showed it is vulnerable to hacking that can change the outcome of races without leaving evidence of fraud, a county election supervisor said. The voting system maker, Diebold Inc., sent a letter in response that questioned the test results and said the test was "a very foolish and irresponsible act" that may violated licensing agreements.
Company spokesman David Bear did not return a phone call from The Associated Press seeking comment Thursday. Diebold's letter was written by its senior lawyer, Michael Lindroos, and sent to the state of Florida, Leon County and the county election supervisor, Ion Sancho.
Optical-scan machines use paper ballots where voters fill in bubbles to mark their candidates. The ballots are then fed into scanners that record the selections.
In one of the tests conducted for Sancho and the non-profit election-monitoring group BlackBoxVoting.org, the researchers were able to get into the system easily, make the loser the winner and leave without a trace, said Herbert Thompson, who conducted the test.
He also said the machine that tabulates the overall count asked for a user name and password, but didn't require it.
In the other test, the researcher who had hacked into the voting machine's memory card was able to hide votes, make losers out of winners and leave no trace of the changes, said BlackBox founder Bev Harris. The memory card records the votes of one machine, then is taken to a central location where results are totaled.
Sancho criticized the Florida Secretary of State's Office, which approves the voting systems used in the state, for not catching the alleged problems.
A spokeswoman for the secretary of state's office said any faults Sancho found were between him and Diebold.
"If Ion Sancho has security concerns with his system, he needs to discuss them with Diebold," spokeswoman Jenny Nash said.
The Miami Herald reported Thursday that Sancho scraped Leon's Diebold machines this week for a voting system from another manufacturer.
Many Florida counties switched to computer-based elections systems after the 2000 presidential election, when the cardboard punchcard ballots then in use were plagued by incomplete and multiple punches.
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EXCLUSIVE: SECURITIES FRAUD LITIGATION FILED AGAINST DIEBOLD, INC!
EIGHT CURRENT AND FORMER EXECUTIVES NAMED AS CO-DEFENDANTS, INCLUDING FORMER CEO O'DELL AND NEW CEO SWIDARSKI
CLASS ACTION SUIT ALLEGES FRAUD, INSIDER TRADING, MANIPULATION OF STOCK PRICES, CONCEALMENT OF KNOWN FLAWS IN VOTING MACHINES AND COMPANY STRUCTURAL PROBLEMS
By Brad Freidman BradBlog December 13, 2005
http://www.bradblog.com/archives/00002153.htm
The BRAD BLOG can now report that a Securities Fraud Class Action suit has been filed against Diebold, Inc. naming eight top executive officers in the company as co-defendants. The suit has been filed by plaintiff Janice Konkol, alleging securities fraud against the North Canton, Ohio-based manufacturer of Voting Systems and ATM machines on behalf of investors who owned shares of Diebold stock and lost money due to an alleged fraudulent scheme by the company and its executives to deceive shareholders during the "class period" of October 22, 2003 through September 21, 2005.
The suit was filed today in U.S. Federal District Court in Ohio and alleges the company "artificially inflated" stock prices through misleading public information designed to conceal the true nature of Diebold's financial and legal situation. The defendants are also alleged to have attempted to disguise well-known and ongoing problems with Diebold's Voting Machine equipment and software. Additionally, the suit alleges insider trading by defendants resulting in proceeds of $2.7 million. Remedies are sought under the Securities Exchange Act of 1934.
The suit, filed by the law firm Scott+Scott, LLC on behalf of Konkol and the plaintiff class, names former Diebold CEO and Chairman, Walden O'Dell as a co-defendant along with seven other current and former officers of the once-venerable company.
News of the pending litigation was first reported as imminent in an exclusive report by The BRAD BLOG late last week.
Yesterday, in a surprise announcement, O'Dell unexpectedly resigned from the company. A Diebold press release described O'Dell as leaving the company for "personal reasons". He was immediately replaced by the company's president and chief operating officer, Thomas W. Swidarski, who had directly overseen Diebold's Election Systems subsidiary division for some time. Swidarski is also named as a co-defendant in today's class action suit.
After news was released of weaker-than-expected third-quarter earnings on September 21, Diebold stock prices plummeted 15.5% in unusually heavy trading that resulted in a one day sell-off costing investors more than $40 million dollars. The complaint describes Diebold and the co-defendants as having "failed to disclose adverse facts known" to the company and that they "participated in a fraudulent scheme and course of business that operated as a fraud."
The suit, to be released in full by The BRAD BLOG shortly, (UPDATE: Full suit now available for download here) alleges Diebold and the eight co-defendants failed to alert investors to adverse facts known to the company, choosing instead to participate in a "fraudulent scheme and course of business" that operated as a fraud or deceit on the company's shareholders.
The suit describes the liabilities of the company and co-defendants as follows:
"Each defendant is liable for (a) making false statements, or (b) failing to disclose adverse facts known to him about Diebold. Defendants¹ fraudulent scheme and course of business that operated as a fraud or deceit on purchasers of Diebold publicly traded securities was a success, as it (a) deceived the investing public regarding Diebold¹s prospects and business;
(b) artificially inflated the prices of Diebold¹s publicly traded securities; (c) allowed insiders to sell over 51,000 shares of Diebold stock, for proceeds of $2.7 million; and (d) caused plaintiff and other members of the Class to purchase Diebold¹s publicly traded securities at inflated prices."
THE DEFENDANTS
Named as co-defendants in the suit along with former CEO O'Dell and new CEO Swidarski are President of International Operations, Michael J. Hillock; Senior Vice President of Customer Solutions, David Bucci; Interim Chief Financial Officer, Principal Accounting Officer and Controller, Kevin J. Krakora; Vice President and Chief Information Officer, John M. Crowther; Senior Vice President and CFO, Gregory T. Geswein; and President and COO, Eric C. Evans. (Titles applied to the named co-defendants during the class period. Evans, for example resigned from the company on the same day as the Sep. 21, 2005 announcement.) "Each individual defendant," the suit points out, "owed a duty to the Company and its shareholders not to trade on inside information."
The claim cites a number of allegedly misleading news releases pertaining to the fitness and security of election systems as contracted by Diebold in San Diego County in 2003; their settlement for $2.6 million with the state of California in 2004, wherein Diebold is alleged to have concealed "the dimensions and scope of internal problems at the Company" from investors; and an "astonishingly low and incredibly inaccurate" statement about "restructuring charges" in the Sep. 21 announcement.
Once again, quoting from the lawsuit:
"During the Class Period, defendants knew and concealed that:
"(a) the Company remained unable to assure the quality and working order of their voting machine products;
"(b) the Company lacked a credible state of internal controls and corporate compliance;
"(c) the 2004 settlement with the State of California served to conceal from investors the dimensions and scope of internal problems at the Company, impacting product quality, strategic planning, forecasting, guidance, internal controls and corporate compliance; and
"(d) the Company¹s "prediction" of astonishingly low and incredibly inaccurate restructuring charges for the entire 2005 fiscal year grossly understated the true costs defendants faced to restructure the Company.
The complaint alleges that the company lied to investors about the true costs of its restructuring activities, concealing the fact that Diebold was facing far worse restructuring issues than publicly represented -- indicative of far greater problems than the company was willing to reveal.
For example, the complaint indicates that the problems Diebold faced in California in 2004 were merely the tip of an internal structural iceberg which the company had sought to conceal from investors when they decided to make a settlement in the case. Investors could not know then that the problems revealed by the California litigation in 2004 were a sign of more and deeper internal problems to come. The settlement agreed to by Diebold in that case, the suit alleges, was meant to keep a lid on the larger dimensions of the problems, rather than indicating that the issues at stake had been fully resolved. Press materials released by the company announcing the settlement -- and included in the version of the complaint filed today -- seem to indicate otherwise to investors.
...THE INSIDER...
Additional facets of the company's internal structural problems were revealed in a series of previous BRAD BLOG articles reporting on an anonymous company insider we dubbed "DIEB-THROAT" who alerted us to the "Cyber Alert Warning" issued by a branch of the Dept. of Homeland Security in August of 2004. That warning concerned the vulnerability to hackers of Diebold's central vote tabulating software prior to last year's Presidential Election. The election watchdog organization BlackBoxVoting.org, who had first discovered the vulnerability, had also recently arranged for a computer security expert to successfully hack into actual Diebold voting machines used in Leon County, Florida without leaving any trace of the manipulation.
It was just several days after our first report on DIEB-THROAT that stock prices plunged at the company in September. Diebold attempted to blame their troubles, at the time, on bad weather in the gulf which lead our insider source to aver: "Using Hurricane Katrina is a poor excuse for bad products -- the last time this kind of deception occurred it was called Enron."
Internet news site, The RAW STORY recently ran their own interview with DIEB-THROAT revealing still more structural problems within the company and its voting division. The report explained that the company was "plagued by technical woes," even as a Diebold spokesperson claimed the 144-year old company "has a sterling reputation in the industry."
...THE PLAINTIFF...
Plaintiff Konkol, a just-retired 29-year public school employee from Central Wisconsin first invested in Diebold in 1999. She told The BRAD BLOG that she purchased the stock thinking, "ATM's that'd be the way to go." She originally invested $500 which eventually grew to $1400 before falling. She is also invested in Diebold via mutual funds held by the Wisconsin Education Union in which she is a member. Konkol, a 56-year old grandmother of three, recently returned from two weeks of volunteering on the Gulf Coast with several members of her Lutheran church. "We got a big group together and we went down to the Gulf to help out in Katrina."
"I believe in churches...I believe we should practice what we're preached to about," she told us. "I don't like it when big companies take advantage of us little people," she said. "I can't say that I'm anti-big business...I just want things to be fair."
It appears that Scott+Scott, the attorneys associated with the case, are just beginning to learn about the full scope of the fraud allegedly perpetrated by Diebold on investors. Amended complaints with additional details are expected to be filed in the weeks and months to come. Other law firms are also expected to file similar suits which will eventually be consolidated by the Federal District Court hearing the case. Indeed The BRAD BLOG has been contacted since filing our original report on this last week, by other firms who are said to be pursuing similar litigation against Diebold.
...THE REFORMERS...
As one of America's largest Voting Machine Companies (along with ES&S, they account for the tabulation of more than 80% of America's votes every election) Diebold has been the target of Election Reform advocates for their strong partisan support of Republican causes and candidates, a statement made prior to last year's Presidential Election to Republican fundraisers by O'Dell that he was committed to "delivering the state of Ohio" to George W. Bush, along with their reluctance to include verifiable paper ballots with their voting products and to make the source-code for their software open and available for public inspection.
A recent 100+ page GAO report, shamefully unreported by the mainstream media, confirmed many of the Election Reform advocates concerns about the security and vulnerability of Voting Equipment made by Diebold and other such companies. In California, a recent mock election test revealed that some 20% of Diebold touch-screen voting machines failed to operate as expected after being previous decertified for similar failures and vulnerabilities. Despite that, California's Republican Sec. of State Bruce McPherson remarkably is considering re-certifying those same machines in the state which Diebold has described as America's "largest voting market."
Diebold was one of seven major American Voting Machine companies named in Velvet Revolution's "Divestiture for Democracy" campaign launched on Presidents' Day last February. The campaign demanded accountability and openness by the Voting Machine Companies in what Velvet Revolution deemed a "patriotic duty" to "ensure free, fair and transparent elections" by the private companies entrusted with running our sacred public democracy. The BRAD BLOG is a co-founder of VelvetRevolution.us.
Konkol's complaint as filed today demands "a trial by jury."
The BRAD BLOG will of course, compile an extensive, accurate and verifiable paper trail in regards to this story as it continues to unfold...
UPDATE: Scott+Scott, LLC releases news of the case filing in a press release here:
http://biz.yahoo.com/prnews/051213/netu036.html?.v=32
FURTHER UPDATE: Reuters picks up the story http://tinyurl.com/7g4xz . Unable to get comment from Diebold.
UPDATE 12/14/05: A full copy of the complaint is now available for download here: http://www.bradblog.com/archives/00002158.htm
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DEVASTATING HACK PROVEN - LEON COUNTY DUMPS DIEBOLD Black Box Voting December 13, 2005 Updated December 16, 2005
http://www.bbvforums.org/cgi-bin/forums/board-auth.cgi?file=/1954/15595.html
Volusia County (FL) joins Leon in dumping Diebold. Due to contractual non-performance and security design issues, Leon County (Florida) supervisor of elections Ion Sancho has announced that he will never again use Diebold in an election. He has requested funds to replace the Diebold system from the county. On Tuesday, the most serious ³hack² demonstration to date took place in Leon County. The Diebold machines succumbed quickly to alteration of the votes. This comes on the heels of the resignation of Diebold CEO Wally O'Dell, and the announcement that stockholder's class action suits and related actions have been filed against Diebold by four separate law firms. Further ³hack² testing on additional vulnerabilities is tentatively scheduled before Christmas in the state of California.
Finnish security expert Harri Hursti, together with Black Box Voting, demonstrated that Diebold made misrepresentations to Secretaries of State across the nation when Diebold claimed votes could not be changed on the ³memory card² (the credit-card-sized ballot box used by computerized voting machines.
A test election was run in Leon County on Tuesday with a total of eight ballots. Six ballots voted "no" on a ballot question as to whether Diebold voting machines can be hacked or not. Two ballots, cast by Dr. Herbert Thompson and by Harri Hursti voted "yes" indicating a belief that the Diebold machines could be hacked.
At the beginning of the test election the memory card programmed by Harri Hursti was inserted into an Optical Scan Diebold voting machine. A "zero report" was run indicating zero votes on the memory card. In fact, however, Hursti had pre-loaded the memory card with plus and minus votes.
The eight ballots were run through the optical scan machine. The standard Diebold-supplied "ender card" was run through as is normal procedure ending the election. A results tape was run from the voting machine.
Correct results should have been: Yes:2 ; No:6
However, just as Hursti had planned, the results tape read: Yes:7 ; No:1
The results were then uploaded from the optical scan voting machine into the GEMS central tabulator, a step cited by Diebold as a protection against memory card hacking. The central tabulator is the "mother ship" that pulls in all votes from voting machines. However, the GEMS central tabulator failed to notice that the voting machines had been hacked. The results in the central tabulator read:
Yes:7 ; No:1
This videotaped testing session was witnessed by Black Box Voting investigators Bev Harris and Kathleen Wynne, Florida Fair Elections Coalition Director Susan Pynchon, security expert Dr. Herbert Thompson, and Susan Bernecker, a former candidate for New Orleans city council who videotaped Sequoia-brand touch-screen voting machines in her district recording vote after vote for the wrong candidate.
The Hursti Hack requires a moderate level of inside access. It is, however, accomplished without being given any password and with the same level of access given thousands of poll workers across the USA. It is a particularly dangerous exploit, because it changes votes in a one-step process that will not be detected in any normal canvassing procedure, it requires only a single a credit-card sized memory card, any single individual with access to the memory cards can do it, and it requires only a small piece of equipment which can be purchased off the Internet for a few hundred dollars.
One thousand two hundred locations in the U.S. and Canada use Diebold voting machines. In each of these locations, typically three people have a high level of inside access. Temporary employees also often have brief access to loose memory cards as machines are being prepared for elections. Poll workers sometimes have a very high level of inside access. National elections utilize up to two million poll workers, with hundreds or thousands in a single jurisdiction.
Many locations in the U.S. ask poll workers to take voting machines home with them with the memory cards inside. San Diego County (Calif) sent 713 voting machines/memory cards home with poll workers for its July 26 election, and King County (Wash.) sent over 500 voting machines home with poll workers before its Nov. 8 election.
Memory cards are held in a compartment protected by a small plastic seal. However, these simple seals can be defeated, and Hursti has found evidence that the memory card can be reprogrammed without disturbing the seal by using a telephone modem port on the back of the machine.
The Hursti Hack, referred to as ³the mother of all security holes² was first exposed in a formal report on July 4:
http://www.blackboxvoting.org/BBVreport.pdf
Diebold has insisted to county and state election officials that despite Hursti¹s demonstration, changing votes on its memory cards is impossible. (Public records from Diebold, including threat letter to Ion Sancho:
http://www.bbvforums.org/forums/messages/2197/10535.html )
On Oct. 17, 2005 Diebold Elections Systems Research and Development chief Pat Green specifically told the Cuyahoga County (Ohio) board of elections during a $21 million purchasing session that votes cannot be changed using only a memory card. (Video of Pat Green:
http://www.bbvforums.org/forums/messages/2197/14298.html ) Over the objections of Cuyahoga County citizens, and relying on the veracity of Diebold¹s statements, the board has chosen to purchase the machines.
According to Public Records obtained by Black Box Voting, Diebold has promulgated misrepresentations about both the Hursti Hack and another kind of hack by Dr. Herbert Thompson to secretaries of state, and to as many as 800 state and local elections officials.
Stockholder suit filed by the law offices of Stull, Stull & Brady and also by Scott and Scott.
Stull Stull & Brady lawsuit:
http://www.bbvforums.org/cgi-bin/forums/board-auth.cgi?file=/8/15603.html
and:
http://www.bradblog.com/archives/00002153.htm
Diebold CEO resigns:
http://www.informationweek.com/news/showArticle.jhtml?articleID=175001748
............
VOLUSIA COUNTY DUMPS DIEBOLD TOO Orlando Sentinel
DELAND -- Diebold voting machines will soon be history in Volusia County. After a nearly five-hour hearing today, County Council members voted to replace its Diebold machines with an entirely new system manufactured by Election Systems & Software.
The move, which will cost more than $2.5 million just for the equipment, was prompted by a federal mandate to buy at least one handicapped-accessible voting machine per precinct by Jan. 1. But the only such devices approved for use in Florida are ATM-like touch-screen machines that don't use paper ballots. But a majority of County Council members want devices that use paper.
The agreement approved Friday on a 4-3 vote allows the county to trade in the paperless touch screens for an ES&S-supported ballot-marking device with an accessible touch-screen called AutoMark if it gets approved for use in Florida. That would cost an additional $150,000.
If AutoMark certification doesn't happen by April 1, the county has the option to get out of the entire contract with ES&S and get a full refund.
Chairman Frank Bruno, Art Giles, Carl Persis and Dwight Lewis voted for the ES&S contract. Council members Joie Alexander, Bill Long and Dwight Lewis opposed it.
The vote ends a nearly year-old debate in Volusia County about how to comply with the federal Help America Vote Act, which mandates accessible voting devices.
Informant: NHNE
Starmail - 19. Dez, 22:51
