This stockholder derivative action is brought on behalf of Intrusion, Inc. against certain members of the Company’s Board of Directors (the “Board”) and Company Officers for breach of their fiduciary duties in issuing, causing to be issued, or permitting the issuance of materially false and misleading public statements concerning the Company’s computer network product, the Intrusion Shield (“Shield”), as well as for waste of corporate assets and unjust enrichment, during the period October 14, 2020 and August 26, 2021 (the “Relevant Period”).
“Shield” was touted as a proprietary artificial intelligence (“AI”) technology that could detect, analyze, identify and counter cyberattacks without human intervention. Shield, however, was merely a re-branded recycling of Intrusion’s Savant and TraceCop products that lacked the AI capabilities claimed by Defendants. In marketing Shield, Defendants issued or caused to be issued, materially false and misleading statements concerning, inter alia, the parameters and purported success of product testing, and the number and identity of customers who purportedly purchased Shield. In fact, Shield was not only non-functional, its implementation adversely affected customers’ networks, sometimes shutting them down entirely.
In April 2021, while Defendants were assuring the market that the introduction of Shield was proceeding as planned, White Diamond Research (“White Diamond”) issued a report publicizing some of the problems with the Shield and other issues concerning the Company. While Intrusion publicly refuted the White Diamond report, the truth regarding Shield was disclosed when Intrusion failed to rollout 50,000 product seats and, therefore, failed to meet revenue expectations from those sales. Thereafter, Intrusion laid off approximately 20% of its workers and it was subsequently disclosed that SEC had commenced an investigation of the Company.
On April 16, 2021, a securities class action, Celeste v. Intrusion, Inc. et al., Case No. 4:21-cv-00307 (E.D. Tex.), was filed in the United States District Court for the Eastern District of Texas, for violations of the Securities Exchange Act of 1934 (the “Exchange Act”). On May 14, 2021, a second securities class action, Neely v. Intrusion, Inc. et al., was filed in the United States District Court for the Eastern District of Texas, also alleging violations of the Exchange Act. On November 23, 2021, the securities class actions were consolidated (the “Securities Action”) and, on February 7, 2022, an amended complaint was filed in the Securities Action (the “Securities Complaint”). On April 13, 2022, the Securities Action was stayed to permit the parties to file a motion for preliminary approval of class action settlement.
The derivative complaint alleges that Defendants have damaged Intrusion by causing the Company to waste corporate assets by: (i) incurring costs and expenses in connection with the SEC investigation, (ii) incurring costs and expenses to defend itself in the Securities Action, and (iii) settling class-wide liability in the Securities Action. In addition, certain of the Individual Defendants (defined below) were unjustly enriched by selling shares of Company stock in a follow-on offering conducted while the price of that stock was artificially inflated by Defendants’ materially false and misleading statements. Intrusion has also sustained reputational harm, which will result in lost business opportunities, as direct result of Defendants’ breach of fiduciary duties.
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