'Boiler Room' in a Dorm? How Founders
Of FastTrades Reaped Speedy Profits
By MICHAEL SCHROEDER
Staff Reporter of THE WALL STREET JOURNAL
WASHINGTON -- Douglas Colt thought he had found a clever way to
pay his Georgetown University law-school bills.
The 24-year-old student used his knowledge of the Internet in January last
year to create a stock tip-sheet known as FastTrades.com. Within two
months, more than 9,000 online users had signed up for a free six-month
subscription to the site, which offered a weekly tip on a low-priced stock
poised for a big run-up in price.
That's when Mr. Colt's private business plan kicked in. According to a
message he left on a Web page, the strategy might work like this:
"Buy a bunch of the garbage stock. Tell your idiot subscribers about how
great the stock is, and like sheep they will run out and buy it. Dump the
shares you bought a few hours ago to all these suckers."
Plenty of sheep were sheared. In just a month, Mr. Colt and some
collegiate colleagues chalked up trading profits of $345,000 on four
stocks. Among the small group that shared the gains was Mr. Colt's
mother, a city councilwoman in Colorado Springs, Colo.
But fast times at Fast-Trades ran into a problem. The Securities and
Exchange Commission Thursday filed a complaint in U.S. District Court
here charging that the scheme is illegal. Despite his Internet agility, Mr. Colt
left investigators a road map for building a case. His biggest blunder was
an April 29 posting on a rival's Web site that, the SEC says, outlined
alleged fraud.
Among its 11 points:
"Screen for thinly traded stocks in the $1 to $2 range."
"Pull together information from optimistic company press releases."
"Throw in some bull -- about the company being an Internet
wonder."
After selling the stock, "watch the stock steadily tank for the next
month."
"Laugh all the way to the bank."
Instead, the stock sellers ended up in a legal tangle. The SEC accused Mr.
Colt, three fellow Georgetown law students -- Kenneth Terrell, Jason
Wyckoff and Adam Altman -- and Mr. Colt's mother, Joanne Colt, with
stock manipulation. The defendants all settled the case, without admitting
or denying the allegations, and agreed not to commit future violations.
Attorneys for the Colts and Messrs. Terrell and Altman declined to
comment. Jeffrey Roberston, Mr. Wyckoff's attorney, says his client
cooperated with the SEC and is looking forward to graduation.
What concerns stock regulators is the emergence of a risky mix on the
Internet: A new breed of manipulators -- frequently computer-literate
young people -- with immediate access to a growing pool of novice
investors who comb the Net in search of hot stock tips.
Mr. Colt, a third-year Georgetown law student, comes from a prominent
Colorado Springs family and has been active in Republican politics. In a
short 1998 profile in his hometown newspaper, he explained that what
drew him to the GOP was the party's support for less government
regulation. Although he has always been an excellent student, his mother
says, "he's apparently not bright enough," given the legal mess.
He didn't have a track record as a skillful investor. He opened a Charles
Schwab & Co. margin account in 1998, but his 13 investments prior to the
alleged fraud produced a gain of $24, court documents say.
That changed when he started trading his Fast-Trades picks, the SEC
says. On Feb. 16, 1999, an hour before touting Apache Medical Systems
Inc., Mr. Colt bought 5,000 shares at $1.06 a share. On the theory that
Apache's price would spike once the Fast-Trades recommendation went
out, he placed orders to sell the shares as high as $6 each. In fact, the
price rose in frenzied trading of more than a million shares to almost $8 a
share within 30 minutes of the Fast-Trades recommendation. Mr. Colt and
two roommates pocketed $27,938 in profits. Shares of Apache, a medical
firm based in McLean, Va., plummeted later in the day.
Picking stocks isn't all Fast-Trades did. To stir up trading interest, the SEC
alleges, the students promoted the picks with hundreds of postings on
popular Yahoo! Inc. and Raging Bull investment message boards. Using
Georgetown computers to cloak their identities, Mr. Colt taught his two
roommates how to create Internet aliases for message writers who
appeared to be from around the nation.
The strategy was such a success that Mr. Colt persuaded his mother to
trade. Mrs. Colt, 55, manages the family's Giuseppe's Depot Restaurant,
housed in a landmark century-old railroad station in Colorado Springs.
Last year, she spent $60,000 in a successful campaign for a seat on the
city council.
At first, Mrs. Colt's trading produced mixed results, the SEC says. On
Feb. 24, 1999, based on her son's Fast-Trade recommendation, she
bought 14,000 shares of Option Care Inc., a home-health-care firm based
in Bannockburn, Ill. The stock price moved so fast -- first up, then down
-- that she lost $24,000 in 25 minutes.
Her son set her straight on how to trade with limit orders, which specify
buying and selling at precise trading prices. To pay off her losses and raise
a grubstake for the next recommendation, Mrs. Colt borrowed $26,000
from her retirement account and a life-insurance policy, the SEC says. In
two more subsequent trades, Mrs. Colt made $107,000.
Some Internet day-traders caught on to the scheme quickly. On March 13,
a Raging Bull message from "longer-harder" claimed Fast-Trades was a
fraud and invited investors to "e-mail all reasonable complaints to the
SEC." A few hours later, "dwcolt" responded angrily, "You are a moron.
What did Fast-Trades do that is illegal?"
After being tipped off to the alleged fraud in late March, the SEC won't
say by whom, half a dozen enforcement attorneys began combing through
message boards for postings related to Fast-Trades' recommended stocks.
Mr. Colt's footprints were everywhere. He was listed in a computer
program as the "author" of the FastTrades Web site. The National
Association of Securities Dealers also quickly traced much of the trading in
the four stocks to Mr. Colt's Charles Schwab account.
To defend himself against SEC allegations, Mr. Colt hired William
McLucas, a former SEC enforcement chief. Mr. McLucas initially asked
the SEC staff not to bring a case against the young men. There was no way
the SEC would back off when an enforcement attorney working late one
night found the 11-point blueprint message on a competing tip-sheet -- and
traced it to Mr. Colt. No one can explain why Mr. Colt would post such
incriminating material, though it was presented as a critique of his rival's
investment strategies. In any event, the SEC saw the rundown as a good
guide to Mr. Colt's alleged fraud.
But Mr. Colt and his accomplices won't have to pay back their trading
profits. They filed financial statements with the SEC that show an inability
to cough up the money due to legal fees.
In light of the experience, Joanne Colt now says simply: "I'd advise people
to be very cautious about message boards."
Write to Michael Schroeder at mike.schroeder@wsj.com |
