Careers & Cash
THE GREAT INTERNET STOCK SCAM
By Lisa Margonelli
Illustration by Peter Kuper
Greg Molson and John Reed Stark both want to help you navigate the world of stock
message boards, where rumors translate into fortunes on a daily basis. One is a criminal.
One is an SEC attorney. Both agree on this much: in the world of online trading, the
hype is the message.
MESSENGER BOARDS: A BROWSER'S GUIDE (TABLE)
Once upon a time, way back when George Bush was President, high school student
Greg Molson thought Wall Street was very far away from his North Carolina home. A
smart kid with good people skills, he'd watch Oliver Stone's stock market epic,
worshipping the ruthless corporate raider Gordon Gekko, and fantasize about heading
off to the great greed capital of the universe to make it big someday.
Fortunately -- or unfortunately, depending on how you look at it -- in 1997 the Internet
brought Wall Street to Molson, or more specifically, to the basement of his parents'
house. Now 25, Molson (not his real name) quickly became Gekko with a modem,
working a scam that would put the market in his pocket. In fact, Molson became
several dozen different "people" who posted hyperbolic messages on online message
boards about stocks, deliberately driving their prices higher. He started pumping stocks
he had in his own portfolio; he got so good that companies began paying him to work
his magic on their share prices. In three months last year, Greg Molson made $75,000.
That's how dirty pool is played nowadays. When was the last time you heard about an
old-fashioned Wall Street insider-trading scam? Just as Gekko seems passé, so too do
Ivan Boesky and Michael Milken and Drexel Burnham Lambert. The Internet is where
the easy, illegal money can be made now, except that rather than steal information, the
stock scammers of today create it.
Since the Motley Fool launched on AOL in 1994 [see box], Internet message boards --
online spots where anyone and everyone can talk stocks -- have been bringing new
investors and old-time stock hounds alike into a whole new ballgame. There's tons of
good going on out there -- people swapping tips, arguing pros and cons of companies,
chatting with firm executives. But few anticipated the darker phenomenon that came
with giving everyone the power to be a virtual stock pundit. Every person who invests,
after all, has an agenda. Those holding or selling want the price to go higher, higher,
higher. Those short-selling or potentially buying are looking for a dip. When everyone is
working an angle, no one has accountability and the greatest bull market of the century
rages onward, and truth suddenly takes a backseat to hype. And the results go way
further than just rounding errors.
There are freakish stories of stocks prices rocketing 37,636 percent in two days of
trading. In that instance, in late March, it was a case of mistaken identity: Chat-happy
Net traders, fueled by message board tips, poured into a stock with the ticker symbol
APPN (worth less than a penny a share) thinking it was AppNet Systems, an
e-commerce firm. Traders pushed the near-worthless stock to 20 cents a share before
realizing their mistake. In mid-April, a recommendation on Yahoo! caused a stock of
Rand Capital, a Buffalo, New Yorkbased venture capital firm, to jump 200 percent
during a day in which the stock traded at more than 60 times its normal volume. The
stock returned to earth the next day. And so on.
The Senate recently held hearings on online stock fraud; the head of the U.S. Securities
and Exchange Commission (SEC) has given speeches on stock hypesters; news outlets
have come up with such pithy gems as "Crooks are flocking to the Net like sharks to
blood." Halting trading because of wacky message board activity, according to Nasdaq
executive Cameron Funkhouser, has become "a regular occurrence." Such mayhem is
how Molson, who without irony sometimes posts under the screen name "gekko,"
makes his coin. He has no fancy office, no blond eyecandy secretary -- nothing much
more than a computer and a phone line in the basement of his parents' home in North
Carolina. He started out not with Armani suits and a Harvard MBA, but rather a few
credit cards and an endless supply of chutzpah. "One way to look at it," he says, "is that
right now I really have nothing. If it got wiped out it would just be like a psychological
loss." With millions to be made, the only way Molson can lose is if he gets caught.
Over at the SEC in downtown Washington, John Reed Stark's official title is chief of the
Office of Internet Enforcement. But today, he's busy inspecting office furniture. Until a
few months ago, he was chasing down the Greg Molsons of the world from the same
rollerball chairs and steel desks that came in during the Roosevelt administration. Now,
though, with a new set of office furniture and, most importantly, a high-speed
Pentium-powered PC with all the trimmings, Stark is ready to fight securities fraud in the
Internet age.
With a staff of nine -- up from just one four years ago -- Stark, 34, is in charge of
holding the line on fraud everywhere online, but particularly in the message boards.
While Molson scams, Stark crusades. Stark worked for the SEC, then prosecuted
street crimes in D.C. for the U.S. Attorney's office. He then jumped back to the SEC,
where he spent his weekends preparing a brief on Internet fraud back in 1995. He
hasn't let up since. He possesses an aw-shucks righteousness akin to Jimmy Stewart in
Mr. Smith Goes to Washington. If his life were made into a movie, the director would
cast Tom Hanks. "The staff [at the SEC] is really a group of people who want to do
good," he explains with Hanksian earnest.
Of course, the good guys need a foil. "We appreciate the technology of the Internet, but
there's the dark side -- people who are out to spoil it," Stark says. "And that's what
motivates us." Besides his staff of nine, he has deputized 240 volunteer SEC attorneys
to surf the Net, looking for scam artists. So far they've busted 84 of them. "You don't
need to be very sophisticated about anything," says Stark of his quarry. "And it doesn't
have to be a global conspiracy. You can just be one person."
And that is where Stark and Molson actually have something in common. "I'm a
hypester," Molson admits in a soft southern accent. "It sounds terrible, yet I use those
boards to my advantage." And while what he does is absolutely illegal, in a weird fin de
siècle twist, Molson markets himself in the hope that he can attract still more corporate
clients; he corresponds by e-mail, gives interviews to reporters and apologizes that he
can't reveal who pays him what. "I wish it wasn't like this," he says regretfully, claiming
that the companies who pay him to hype their stocks would "love the publicity." Given
that the penalties for stock touting are considerable, Molson seems to have an almost
pathological need to proselytize -- to hype the concept of hype. Maybe that's what
makes him so good at his job.
When told about Molson's publicity penchant, Stark laughs. "You don't have to be Eliot
Ness to figure these things out," he says. "Even with my SEC address, I'm at the
receiving end of spam -- they're marketing themselves." Stark, meanwhile, pumps up the
SEC and its decidedly un-Gekko-like vision of the market. He personally dubbed the
SEC investigators "the cyberforce." "It's a totally goofy name," he admits, "but I wanted
people to get excited." Officials at Nasdaq joke that the cyberforce "wears silver suits."
Undeterred, Stark does PowerPoint presentations from his laptop using audio clips from
Hawaii Five-O, Smash Mouth and Motown. And, like Greg Molson, Stark gives out his
e-mail address -- but to the hundreds of people per week who complain to the SEC
about Internet stock scams.
Molson and Stark are more than just archenemies, black hats versus white hats --
they're combatants for the soul of the stock market. Molson fervently believes that the
whole market is based on hype. "Yahoo! is worth more than Boeing -- and there really
is not a lot behind it." (He's wrong: Boeing's actually worth more than Yahoo!, but we
get the point.) Stark, meanwhile, sees an orderly market, based on real values. Net
stock roulette is not his style. "You should choose a stock like you're choosing a doctor
for heart surgery for your loved one," Stark says. "Pore over the financials and guts of
the company." This summer, with almost uniformly unprofitable Internet company stock
prices hovering at 46.6 times sales (compared with 2.6 for the S&P 500 as a whole),
whose view of the market will triumph is debatable.
Grab a beer tonight. Sit back and get comfy. Now point your browser to the finance
area of Yahoo!. Within a few clicks you'll be deep in the bowels of the online stock
discussion world, staring at more than 7,800 separate message boards for every major
stock on the planet. Each message board contains thousands of postings, some
numbering well over 150,000. If you could see all of the people on the message boards
tonight, they'd fill a large stadium. Now keep in mind that for every post, there are at
least ten people reading, trying to figure out if XCIT or IBM or EBAY is going up or
down. They have names like StruttingSwashBuckler and cream_god.
Of course, most of them own stocks -- why else would they be here? You could try the
message boards at Motley Fool, or the subscription boards at Silicon Investor, which
cost $120 per year, and feature slightly more high-minded discussion, but Yahoo! is
ground zero of the "everything goes" style of stock chat. Think of it as the new Harry's
at Hanover Square, a bar near Wall Street where insiders have long swapped tips. Only
now, it's not just inside, it's outside -- massive, nationwide, and incredibly, elusively,
idiotically, powerful.
From wall_st_yoda: "As soon as everyone realizes that ZDNet is the next YahooŠthis
thing is going to the moon!"
From Sphincterdotcom: "Grab your ankles and take it my friends. The hype will die
down shortly and the stock will drop back, wilt if you will."
From flyfishingimpressionist: "Does anyone else out there feel like we are sitting in at the
Mad Hatter's Tea Party?ŠI threw out all the standards that go with cautious
INVESTING, and went to Las Vegas East ie Wall Street. Well I'm up 33%, 65+% and
about 50%ŠAbsolutely DUMB LUCK ŠThus my question: Has this market marked the
end of investing as it was, and the beginning of something entirely new?"
In the message board world, "Las Vegas East" is quite a common term. "We're
experiencing the greatest bull market in history and we're in the midst of an incredibly
technological revolution," says Stark. "More and more people own stock, and they're
making a ton of money. They get greedy and they want more." At the beginning of the
decade, only one in five U.S. households owned stocks; today it's one in three. Some
stocks -- like Egghead, K-Tel and Infonautics -- have about half their available shares
controlled by individual online buyers. Between October 1998 and February 1999, the
Nasdaq Composite rose 80 percent. Amazon.com saw its stock go from $12 on April
27, 1998 to $220 exactly one year later. "There are so many new buyers coming in,"
says Dave Hammond, manager of a hedge fund, "that it's just a liquidity pump." In other
words, the number of people injecting their savings into the market, and purchasing from
a small pool of Internet stocks, is inevitably driving those stocks to new heights. And by
2002, boosted in part by the growth of Net trading, 50 percent of U.S. households will
own stock.
"What [this market] is is the power of the individual investor, who really has way too
much speculative money, because they all believe that stocks are going to get them rich
and let them retire early," says Hammond. "They have no sense of risk control because
the market's done nothing but go up for fifteen years."
"The only folks talking about the bubble bursting are the fundamentalists watching the
internet investors drive by in their big autos and up to their homesŠthat have the latest
DVD technology." -- evelPass, chatting in the Yahoo! Finance message boards
"I've taken my life savings and put my money on the craps table. I have confidence in
the momentum and I'm not going to wait 50 years to make something, I want it now.
I've come to the stage where I can't depend on Lotto. If I post this and I can get
someone to buy, I'm sure it will boost the stock." -- Beautylegswoman, a message
board poster who has doubled her $5,000 nest egg over the past six months
In this environment, the hypester was made, not born. Molson started trading a few
thousand dollars last year -- his first stock was Yahoo!. That was when he began
posting on Yahoo!'s message boards too, but, like Beautylegswoman, he was posting
sincerely. Then things got out of control. "Sometimes I'd be in class and my pager [set to
alert for price fluctuations] starts going and I'll go running out of class down to the library
to make a trade. It was getting ridiculous." He dropped out of school because he figured
trading would bring him more money than a degree and a job in a cube anyway.
Molson started to put all of his money in short-term trades on Net stocks. He made
tons of dough. And he started noticing that some guys had all the fun in the message
boards. "The same name kept popping up in the boards. It was like people were
worshipping this guy." Molson says whenever this poster picked a stock to rise, it did --
people followed him avidly and put money on his picks. Molson started to watch him
closely, too. "He'd run that stock up and they'd all bail out. Then he'd go on to the next
board. I realized, This guy's making stuff move."
Molson lost everything last fall (on one trade) when the stock market had a "correction"
it managed to talk itself out of within three months. He went so far into the red that he
had to borrow $15,000 on his credit cards to restore his brokerage account. That's
when he started thinking about hyping stocks himself. He began to accumulate fake
e-mail addresses and profiles: a housewife, a 40-year-old exec from L.A., a guy from a
small town in Minnesota -- lots of rather elaborately average profiles. "If you sound
reasonable and knowledgeable, I think it's more likely that people will buy the next
morning," he says.
Molson's MO is pretty straightforward: "I'll get maybe five or ten thousand shares and
I'll hold them for several days. I'll post up to 100 messages per night hyping the stock.
In the morning, after the posts have been hyped all night long, there are several traders
who literally go through those boards looking for plays. In the morning you get a lot of
buy orders coming in. Just buy after buy after buy." He pauses, and his voice trails off as
he mulls over the beauty of all those buy orders flying across the screen. Shortly after
this conversation, he reports he made a quick $10,000 on Ziff-Davis.
Sure, hype helps sell stock,but there's always some story, based on fundamentals,
behind it, right? Curious to burst that theory, Molson conducted a test in mid-December
to see whether the market could run on pure hype. With a friend, he hit the message
boards, pumping two sleepy stocks -- "dogs" in his estimation -- trading in the
two-to-three-dollar range with a small float. One of the chosen stocks was Millbrook
Press (MILB), a small publisher of children's books. On December 10, Molson posted
the following: "MILBŠinternet bookseller up 60% today, New website comingŠ. Check
it out." Every night for the next week, he and his friend posted similar messages in
boards far and wide. On December 16, he posted this: "Today: AMZN and
BAMMŠtomorrow MILB -- This is another internet bookseller, the only difference is
that MILB is profitable!" (Amazon was then at $99 per share.)
The next day, some traders started playing MILB, and the message board hypesters
added fuel to the fire, until the stock hit $7. They did the heavy lifting to get the stock
noticed -- then, according to Molson, they got help. "I was watching when CNBC
[covered it] and within three minutes it was at $30 -- and Nasdaq halted trading,"
Molson brags slyly.
Typically, the last part of Molson's MILB story is itself pure hype. There was never any
CNBC story, no spike to $30, no Nasdaq shutdown -- just a slow wilt from $7 back to
the $2 range.
It was a significant run-up nonetheless. Months later, some people on the message
boards were still trying to figure out what hit them. On February 13, someone posted,
like a deserted lover, "I'm starting to feel sick!!ŠI love MILB, been long for a long time.
After today I'm not feeling well. I don't get it. Great company, good book valueŠ Y is
this stock at $3.00?????? It should be at least $10." Someone else answered: "I still
believe that those who bought stock in late December at much higher prices have some
idea concerning the future of this companyŠand they put their money on the line." The
stock had a slight rally in March, then eased downward again. "We're a small,
business-minded company in a staid industry, says Millbrook CFO David Allen. "We
had no reason to see why the stock even went up to $4." In the words of the great
Gordon Gekko: "Money itself isn't lost or made, it's simply transferred from one
perception to another."
Cory Johnson, editor-at-large for the finance and investment site TheStreet.com (itself
recently a hotly hyped IPO), won't defend Greg Molson. After all, every time Molson
pumps and dumps, some naïve investor gets screwed. (In the case of MILB, he even
brags about it.) But Johnson, who likens the Internet's role in the market to a social
revolution along the lines of Haight-Ashbury in the sixties, isn't about to get his dander
up about it, either: "This really is a watershed period. It's all about people taking control
of their lives and their finances -- including the freedom to lose all of their money if they
want to. The good people at the SEC and the Wall Street Journal really have a
paternalistic attitude, and believe that the average American is a fool and shouldn't be
trusted to invest his or her own money. But people are doing it anyway. The message
boards give a voice to this movement."
Stark has heard this argument before, and he's not convinced. "These cases involve
lying, cheating and stealing," he says passionately. "I don't think anyone -- no matter
how much of a libertarian they are when it comes to the Internet -- will argue that these
people have a right to lie, cheat and steal." At the heart of Stark's campaign is his sense
that people are as willing to blindly believe in something they read on a message board
as they are to believe that the person they met in a chat room really is a bored
22-year-old Swedish model. "Hopefully, people are learning that you can't trust
strangers on the Internet," he says.
Stark also hopes some high-profile busts will drive his point home. When the FBI, SEC
and state officials busted Gary Dale Hoke for his PairGain Technologies hoax in April,
the SEC was on your TV screen, right next to Hoke, who, like Molson, is from North
Carolina. Hoke had created a fake Bloomberg financial Web page to inflate PairGain's
stock price.
And just as technology has made stock trading a far faster game, so too, has it speeded
investigations against the bad guys. The PairGain investigation took just two weeks,
compared with the SEC's traditional six to twelve months. The Molsons are easy to
catch, as they leave their e-mail addresses and identities behind them, just a layer or two
under their disguises.
Catching the bad guys is fun, and Stark and his army of cybersleuths are helping turn the
dowdy SEC -- once a quiet agency filled with number-crunching attorneys in gray suits,
chasing bad guys like Michael Milken for crimes no one outside high finance could
understand -- into an agency that's decidedly populist. SEC investigators have become
minor celebrities in white hats, riding their mice to the rescue of the individual investor.
And a vigilante culture has developed around them. "One thing about the Internet is that
people don't like anyone ruining it," says Stark. "They're just relentless. We've received
1,000 to 1,500 complaints about a single spam. People love telling us stories. And we
love hearing about it." Some of the cases the SEC has brought so far have been against
scammers who were caught before their scam had any victims. "I would say we're
winning," says Stark.
Does Greg Molson think the SEC is winning? It's hard to know, as "Greg Molson" as
we know him has dropped off the face of the Net. His last communication to p.o.v. was
this: "I have been doing well trading, I have several new IDs I have been using."
Sometime in late April -- about the time Yahoo! posted a notice describing the stock
message boards as "entertainment" -- he erased the last of his profiles. Where is he
now? Is he the target of an SEC investigation? Did he make his fortune and get out
quick? Or was he finally a victim of hype -- this time Stark's -- about the SEC
crackdown on stock scammers? For the ultimate stock promoter, that would be the
ultimate irony.
Lisa Margonelli is a staff writer at P.O.V. |
