Tale of Tout
[John Liviakis is the original PR guy for NTGN]
94/03
Tale of Tout
A California stock promoter is making big waves on Wall Street.
By Gary Hector
In an office with fading carpet and cracked walls in a shabby Sacramento neighborhood, stock market history is being made--on the telephone.
Promoter John Liviakis is demonstrating how he works the line in virtuoso style, telling stockbrokers around the country the story behind Wesco Auto Parts, Inc. In a nutshell, according to Liviakis, Wesco has become "the Domino's Pizza of the parts-distribution industry." And when the rest of the market catches on...does a 400 percent or 500 percent stock-price rise seem too generous a reward for the early birds?
To get its story of 20-minute deliveries in a $48 billion market to influential stockbrokers, Wesco agreed to pay Liviakis a fee of 980,000 shares of Wesco stock. So much stock, in fact--5.6 percent of the outstanding--that Liviakis had to disclose his holding to the Securities and Exchange Commission. For such staggering fees, exceeding the wildest dreams of most financial-public-relations people, Liviakis delivers the goods. Brokers and the customers to whom they relay Liviakis's story are responding to the pitch. In the mere three weeks he has been on the case, the price of Wesco shares has risen to $6 a share from under $3. Pre-Liviakis volume had been less than 50,000 shares a day. After Liviakis, it jumped to a peak of almost 1.8 million shares in one day, more than the number that either Ford Motor or Hewlett Packard traded on that day.
Liviakis's skill in spinning stories from stocks and selling the stories to stockbrokers has been repeatedly demonstrated. And this has made him famous among a large group of followers in the brokerage community. The stocks he promotes often get heavy media coverage, yet Liviakis's behind-the-scenes involvement is almost never mentioned.
Last year, he took on five obscure clients and, in a matter of weeks, helped increase the total market value of their shares by more than a quarter of a billion dollars. The share price of one client, InVitro International, increased 28 times, to $14 a share from 50 cents. In all cases, the share prices since have retreated somewhat, and the gain in market value has shrunk. Even so, for a promoter whose first client was Cascade International, it was a remarkable series of coups.
Cascade made stock market history, too, in its own way. In 1991, investors became aware that its story--about the business of operating cosmetics counters in drugstores--was largely fake. The company was liquidated; its shares were worthless. Liviakis took on Cascade as a client in 1985, when the stock was selling for less than $1, and worked with little apparent success to push the price up. In 1988, he says, he resigned the account. "My initial instincts told me something wasn't quite right," he says now, although it took two years before those instincts compelled him to quit Cascade. The shares peaked at $11.75 in 1991, without Liviakis's assistance, before tanking.
Since then, Liviakis's instincts have worked to his benefit. He has become a phenomenon in the small-cap market, the promoter turned guru. Every steamy market seems to produce one. In the early 1980s, it was Steven Greenberg, a flamboyant PR man-about-New York who got rich from the start in the casino stocks he was hired to promote. Liviakis's and Greenberg's precursors pushed investment trusts in the 1920s, Canadian mines in the 1950s, and advanced technology ever since the 1960s. Occasionally, one of them would find the genuine article, a concern with the market and stamina to join the ranks of America's great little companies. Mostly, however, the promoters found half-baked outfits with stories that sizzled but products that eventually flopped, and the stocks themselves sank back into the obscurity whence they came. For that reason, most stockbrokers distrust most stock promoters. The brokers all know promoters who wouldn't hesitate to inflate the price of worthless securities if they could, leaving the brokers and their clients to the tender mercies of short sellers. But Liviakis doesn't seem in the same class as the garden-variety tout. He not only sells companies; he helps reshape them, refinance them, and hire better management. Among brokers, he has developed a following that resembles a cult.
Liviakis earns his living in a classic Wall Street game that illustrates a simple but profound truth about the place. It is engineered to distribute securities--that is, to sell them--not to buy them. If it were otherwise, brokers would keep to themselves all those investment "products" they assert will double or triple in value next year. Stocks like those on Liviakis's list don't move higher simply because they are great companies, even if some of them are. Little-known stocks, like life-insurance policies, need to be sold. Many, and probably most, will eventually tumble--deep in their hearts, the brokers know that, too--but meanwhile, who wants to argue with the tape? Or the commission statements?
Liviakis might seem an unlikely candidate for deification as guru, but the position demands no professional credentials. He is a college dropout and failed stockbroker with weaknesses for expensive toys: automobiles, horses, and antique furniture. A vegetarian, he pops about 80 diet supplements a day, from vitamins to bee pollen. Posted to his bulletin board are photos of trotting horses that he owns and races.
What Liviakis lacks in formal education, he makes up in passion. He describes his work as a quest to find "the best little companies in the country." He says it takes painstaking research into 1,000 companies a year.
Last year, after more than a decade of scouring, the effort paid off with Projectavision, Inc., a tiny New York company that had developed a projection-television system with an unusually sharp picture. Liviakis discovered the company in 1992 and pushed it for a year without success. Then, last March, the company signed an agreement whereby Matsushita licensed Projectavision's depixelization ray, which will reduce and even eliminate graininess from TV pictures. The terms weren't announced, but the development added sufficient weight to Liviakis's story to move the price to $16.75 at its peak last spring from the 87-cents-a-share level where it had been languishing.
Almost simultaneously, Liviakis scored with InVitro International, of Irvine, California. InVitro makes chemical testing equipment that, it says, will reduce the need for live rabbits in corrosive chemical tests. Then came Lidak Pharmaceuticals, a maker of antiviral drugs that show promise in herpes and cancer therapy. Before Liviakis, Lidak shares traded around $1. With Liviakis spreading the story, they rose to 97/8 in August 1993.
By word of mouth, Liviakis's reputation spread through the brokerage community. His list of contacts grew; he now has the names of 4,000 brokers, investment advisors, and securities analysts on his Rolodex. Increasingly, they took his telephone calls and joined the phone conferences he often uses to make his pitch. By the middle of 1993, Liviakis's endorsement was sufficient for a broker to recommend a stock. In August Liviakis added a fourth client, Advanced NMR Systems, Inc., a maker of high-speed medical-imaging systems. In two weeks, the share price zoomed to nearly $8 a share (on volume of more than 2 million shares a day) from $4 a share (on volume of 200,000 shares a day) before Liviakis began promoting it. Advanced NMR reported a loss of $3.7 million on sales of $1.4 million for the first nine months of 1993, and the share price drifted back to $6.50 before year's end. That still put a market value of $100 million on the company, a figure 50 times greater than its annual revenues.
When Liviakis launched his promotional campaign for Wesco in mid-October, brokers and investors were willing to forget that the company lost more than $1 million in the fiscal year ending in June and that it was running out of cash before he helped it raise new capital. Wesco, too, became a winner.
Liviakis finds it hard to remain modest after such successes. "This may sound obnoxious," he says, "but I'm just being honest with you. We [his firm, Liviakis Financial Communications] have a reputation in the United States now of being far and away the most influential force in the small-cap market. Our name carries an awful lot of clout."
Among the many brokers who have prospered from his promotional efforts, it surely does wield clout. Others, however, find his success disturbing. The real killings in Liviakis stocks have been made by the relatively few investors who got on board early and sold near their peaks. People who bought near the peaks got hurt. InVitro, for example, fell from a high of $14 a share to end the year at $6 a share. It may take a gifted salesman like Liviakis to scout and tout a hot stock, but no amount of promotion can keep buyers from dumping their holdings and taking their gains.
However promising the companies Liviakis promotes, he does put the rosiest possible construction on their prospects. According to him, Projectavision has a revolutionary technology that could change the way the world looks at television. Liviakis says Lidak Pharmaceuticals has "the answer to herpes." And he calls Wesco "the fastest-growing public company in the auto-parts business."
These assertions don't always jibe with more sober views. Wesco, for instance, is growing. But its percentage gains in sales reflect a tiny base. Wesco's future depends on its Reddi Brake Supply Co. division, a chain of retail service stores it just began opening a year ago, with projected yearly pretax profit as high as $230,000 a store. If the Reddi Brake division can reach 100 profitable new stores by the end of 1994, Wesco's stock price may be justified. Reddi Brake has about 30 stores now, so getting to 100 will be no small feat. Brad Dunlap, a broker at Makefield Securities Corp., near West Palm Beach, Florida, is a fan of Liviakis's. Still, he says, "Wesco is either going to be a tremendous winner, or it is going to be like an F-15 with a full tank of gas, crashing into a mountainside."
"We are the most exciting investment opportunity around because we are growing at 500 percent a year," says Gordon Werner, vice chairman of Wesco. "AutoZone has proved you can build a chain. We think we can continue to grow at an extremely rapid rate."
To some professional financial publicists, Liviakis's practice of taking stock in client companies spells trouble. It encourages a PR counselor to assist the market in setting the highest possible price on the client's stock, which may not be the reasonable price that a disinterested professional analysis of corporate prospects would suggest. Liviakis, however, says he only accepts restricted stock that he must hold for at least two years. This, he says, keeps him committed to long-term performance.
Liviakis is controversial partly because the stocks he promotes are inherently speculative. Promise aside, their future depends on products still being developed and on market share not yet secured. It is part of Liviakis's talent that his faith in his clients' ability to realize their potential seems unaffected. In the tradition of promoters from Barnum on, he believes his own spiel. At least it strikes others that way, not least of all his clients themselves. Dr. David Katz, president of Lidak Pharmaceuticals, says, "I've dealt with all types of people in the securities industry. You kind of develop a perception of what the person is going to be. When I met John, he just totally shocked me. This is a genuine, down-to-earth, hardworking, conscientious fellow. There is nothing flippant about him. There is nothing shady about him."
Says Robert Blake, a broker at RAF Financial Corp. in Denver: "We talk on the phone two or three times a day. I know John would never intentionally mislead me. There is some kind of closeness between John and myself. I can't explain it. I've never worked closely like this with anyone else."
Liviakis labors painstakingly to create a story that sells. Before the selling, he prepares his clients. He worries over detail, making sure the company is listed by Standard & Poor's guides and any other standard brokerage references. He fixes any glaring financial flaws. If the company needs cash, he helps arrange to borrow it privately.
So far as the story is concerned, he ignores all elements but the product and the market. Forget that the company is still losing money. Forget that it has no sales. Forget that the competitors are Japanese zaibatsu or a pack of hungry American start-ups. Just look at the product, with gross margins typically 40 percent and going higher, and the market, inevitably measured by the billions, so that even if the company captures only 1 percent of it, its sales would be...you get the idea.
Liviakis spends his day making calls and answering them, always returning to the story. "I have trouble dealing with all the telephone calls," he says. "From the time I walk in here until the time I leave, I don't get a chance to breathe. I don't have a chance to urinate." Liviakis arrives at the office at 5:55 a.m. and leaves at 6:30 p.m. He goes without lunch and dinner breaks because he has "no time to eat." His clients join him in some conference calls with brokers around the country, 50 to several hundred at a time, from small firms such as Black & Co. in Portland and RAF Financial in Denver to regional offices of larger firms such as Oppenheimer & Co.
Liviakis says he succeeds because he is so selective in the clients he represents. They must have a hot "concept," or story, preferably a product with a claim to technological innovation in a large market. The companies must be obscure so far as the securities market is concerned. None of Liviakis's prospects are large enough to be followed by securities analysts, and none have many shares outstanding. "The smaller the market cap, the better," Liviakis says. That makes it easier to get shares into what Liviakis calls "strong hands," long-term investors who can afford to wait weeks or even longer before cashing in on a run-up in the stock price. As the strong hands take shares off the market, Liviakis whips up enthusiasm among other investors, who, by increasing the demand for a shrunken supply of shares, bid the price up.
While the naive may sense something vaguely if legally manipulative in all this, Liviakis puts another spin on it. "With my efforts in investor relations, I profoundly affect the supply/demand equation," he says.
He makes it sound almost like a crusade. "I realized years ago that small-cap companies didn't have any support out there," he says. "There is a bias against them from the brokerage community, investment banks, commercial banks, even institutional investors. There are thousands of small companies that wish they'd never gone public. They've got no visibility, no investment-banking assistance. Their stocks are undervalued and underfollowed.
"Realistically speaking, most small-cap companies never become successes. So the trick is to find the 1 in 500, or 1 in 1,000, whatever the number is, that actually can become a sustained success."In fact, small-cap or "emerging growth" stocks have been Wall Street darlings for nearly two years now. It's just that Liviakis's clients are simply too small and thinly capitalized, even by ordinary emerging-growth-company standards, to attract much attention on their own. They need help, and Liviakis is there to provide it.
"The name of the game is to see something that everybody else hasn't seen yet,"Liviakis says. "Because if it is so obvious, then it is already reflected in the stock's valuation, and there is no opportunity. So we are looking for something that is not obvious, that is not well perceived yet, that does not have any public relations, and the valuation is reflecting that lack of perception and support."
Liviakis believes that he can spot "the best little companies in the country,"but his long-term performance on this score is less than awe-inspiring. Certainly, he is experienced, having followed stocks for 27 years, since he was 10 years old. At that age, he says, he sat at the kitchen table listening to his father, who owned a Sacramento appliance store, discuss the stock market. Young Liviakis persuaded his parents to let him put $25 into a Value Line special-situations stock fund. "Every day I would look at this portfolio of about 100 stocks and dream," Liviakis says. "I'd get quotes for each of the stocks, and I'd pester my broker every day with calls." By 17, he says, he was managing money for relatives and "doing pretty well."
Stocks were just one of his obsessions. His father took him to the racetrack when Liviakis was a teenager. That led to an interest in training horses. At 21, he bought his first racehorse with a partner. He now owns and races 27 standard-bred trotting horses.
His passions led Liviakis to drop out of college. "I'd go to the library every day, but I'd spend my time researching stocks instead of studying for classes,"Liviakis says. He also converted to vegetarianism 20 years ago and hasn't eaten a single piece of meat since.
At 23 he registered as a stockbroker, and he had a system for beating the market, avoiding the heavily traded General Motorses and IBMs of the world in favor of more volatile small-cap stocks. He sold his customers on them, too. His first job was at E.F. Hutton in 1980. He says he "came out of the box fast with the highest first-month [sales] production in E.F. Hutton's history."He stayed at Hutton little more than a year before jumping to Merrill Lynch & Co. His tenure there lasted eight months. He took three other jobs and left them quickly. His entire brokerage career lasted only three years.
A broker who worked briefly with Liviakis remembers him as "a home-run guy, bet the ranch. He's a great salesman, but he's a risk taker. In a market like the one we've got today, his kind of small stocks do very, very well." But markets change, and in the past Liviakis inevitably ran into problems, this broker remembers: "He'd talk his way into a brokerage firm. Then eventually he'd get blown away when one of his picks tanked."
Liviakis had left Merrill Lynch in April 1982. Two months later, two married couples who attended the same Greek Orthodox Church in Sacramento as Liviakis's parents filed a lawsuit against Liviakis in Sacramento. The suit asserted that the couples had entrusted their life savings to Liviakis, who they said had promised to help them earn more than the 7.5 percent they had been getting on the savings. They opened accounts with Liviakis at Hutton and transferred them to Merrill Lynch when he joined that firm. According to the suit, Liviakis put them into small-cap stocks --on margin. When the market fell, the couples lost their life savings. They sued to recover $121,000 plus punitive damages of $1 million. The case was settled privately, Liviakis says, for more than $80,000. "Virtually all brokers have some client who tries to recapture a loss," Liviakis says. "These were fairly sophisticated investors. They were extremely successful when we started. I was a very aggressive broker and typically bought stocks on margin. When the market crashed [in 1982], they'd get margin calls."
Among other stocks, Liviakis had put the customers in Knogo Corp., a tiny manufacturer of electronic surveillance systems to deter shoplifting. The customers bought on margin as Knogo shares fell from a high of 303/8 in 1980 to a low of 91/2 in 1981.
Liviakis says a great many of his customers--among them the two couples--accumulated a "massive position" in Affiliated Hospital Products, Inc., a St. Louis maker of latex gloves and other medical supplies. The stock was thinly traded, with more than 70 percent in the hands of another corporation, so that the purchases by Liviakis's customers drove up the price. After he left Merrill Lynch, some of them sold, pushing the price back down and leaving customers who had kept the stock with monstrous margin calls.
In 1983, out of the brokerage business, Liviakis founded Liviakis Financial Communications. The diligent research he prides himself on now wasn't obvious during his first few years in business. That lack of intensive research and investigation may have led to Liviakis's brief liaison with Victor Incendy, founder and chairman of the now notorious Cascade International, Liviakis's first client. Liviakis admits that with no track record, he had few prospective clients at the time. A friend at Prudential Securities urged him to advise Cascade on investor relations. Liviakis jumped at the chance, despite his instinctive feeling that something was amiss at Cascade.
Cascade was definitely unfollowed and unloved. Its shares languished at 80 cents a share. Liviakis took it on and pushed the stock to about $6 a share. In 1988 Liviakis and Incendy separated. Liviakis says, "I grew increasingly wary of the people involved, the little inconsistencies, and the overall mysterious nature of the place."
A fraud, however, had been set in motion. Cascade's share price rose to $11.75 on company sales figures that were fabricated. Where the company claimed up to 290 cosmetic counters and racks in leading stores, the actual number was closer to 30. Chairman Incendy allegedly had secretly sold millions of shares of authorized stock from his desk drawer. The sales may have realized as much as $100 million, according to Richard Lilly, a former securities analyst at JW Charles Securities, who is writing a book about Cascade.
Lilly says he spotted Cascade early as a fraud and discussed it with Liviakis. Liviakis himself recalls thinking that during the talk, "the light bulb went on in my head." Incendy disappeared from sight; criminal indictments in Manhattan have been brought against him and other officers of Cascade.
Other stocks that Liviakis promoted during the mid-1980s never met his high expectations. Among them were Airship International Ltd., a Florida blimp operator; Holmes Microsystems, a Utah modem maker; Quadrax Corp., a Rhode Island manufacturer of lightweight extra-strength materials for a variety of uses from aerospace to bicycle production; and Big Sky USA Inc. (now known as Organik Technologies, Inc.), a Washington State clothing manufacturer that had developed a system for nonshrinking cotton without using harmful chemicals. The companies weren't flops; they simply never became hot stocks.
Has Liviakis's stock-picking ability improved? He says it was always sharp, but he just couldn't persuade managers of the most promising companies he found to hire him. "I came very close to representing companies that became fantastic winners," he says. "But then I was forced to take companies that were riskier and earlier-stage than I wanted."
Last year's winners have yet to meet the toughest test, that posed by a bear market. A closer look at the jewels in Liviakis's crown should give conservative investors pause.
Projectavision, for example, commands an 87/8 market price based largely on Liviakis's claim that the company's technology "could be revolutionary." Specialists in the field say this particular revolution is already over. Systems similar to the Projectavision system are already on the market from such giant manufacturers as Sharp. And more advanced products are on the way. David Mentley, a specialist in projection TV at Stanford Resources, Inc., says that about a dozen suppliers, including Sanyo and other major Japanese firms, are developing liquid-crystal-display projection systems.
Mentley has seen prototypes of inexpensive systems that, he says, "completely obviate the need" for what Projectavision produces. Those advances are coming from Texas Instruments and Philips Electronics. How then can the market value Projectavision at $98 million? Mentley says he doesn't know. Marvin Maslow, the CEO of Projectavision, says, "We actually like to think of ourselves as the most conservative of Liviakis's companies. We think our stock price represents a reasonable value."
InVitro International, another Liviakis success story, seems equally problematic. No one disagrees that the firm's intentions are laudable. It was created to find test-tube substitutes for scientific experiments done on animals. Its success, however, depends on Corrositex, a test for the corrosivity of chemicals done entirely in a test tube. At present, InVitro says, chemical companies must conduct these tests on the bare skin of live rabbits. The chemical is applied directly and is then checked regularly over a period of 24 hours to see if the chemical has done any irreversible damage to the live tissue. InVitro estimates the market for Corrositex at $200 million to $500 million. Others have tried to verify the size of the market, and can't. A specialist says it is as likely to amount to $10 million as $100 million.
InVitro appears to be making assumptions about a new standard for the transportation of corrosive materials adopted by the U.S. Department of Transportation. Un- der those guidelines, all chemicals and other materials must be classified according to a new three-part rating system. InVitro implies in its marketing material that all chemicals will have to be retested to fit that system, at a presumptive cost of $100 million.
But that simply isn't going to happen, specialists say. Although the agency's standard is new to the United States, it has been in use in other countries for years. As a result, most multinational companies already have the data they need and won't need to re-test all their chemicals to meet the new standards. It's true that many new chemical compounds are created annually, but their corrosivity can usually be determined by referring to prior testing, without the necessity of starting from scratch.
Even if the market is as large as projected, there are reasons why chemical companies might avoid Corrositex. Richard Humburg, a specialist in the transportation of hazardous materials at Dow Chemical, says that Corrositex "is not entirely accurate for some chemical groups." As a result, the Department of Transportation allows Corrositex to be used to prove that a chemical is corrosive--but not to prove that it isn't. If a chemical passes a Corrositex test for safety, the results still must be verified by a conventional rabbit test.
Competition challenges InVitro, too. Procter & Gamble and Advanced Tissue Sciences, a company that grows human tissues and organs, developed a corrosivity test last year that uses engineered skin tissue. Such tests could be more useful than Corrositex's tests, which rely on a synthetic membrane.
The story behind the story at other Liviakis companies is similar. With a little poking around, the risks and questions multiply. It's always possible that hidden away in a lab or a test room, there's a product that will turn one or more of these companies into a Xerox or a Genentech. That hasn't happened yet, and it's by no means clear that it will.
Every bull market breeds a flurry of IPOs by companies that never sold anything but their stock. Liviakis's clients, by and large, seem to be a good deal more solid than that. Certainly they are speculative, but there's nothing wrong with speculation, and the rising tide of a bull market floats all ships. Those with a hand at the bilge pump float even higher. That's John Liviakis--pumping the bilgewater into friendly seas, filling the hold with air.
Gary Hector, a former editor at Fortune, is the author of Breaking the Bank: The Decline of BankAmerica (Little, Brown, 1988).
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