Solving a Message Board Mystery
By Aaron L. Task
Senior Writer
6/2/00 8:42 PM ET
NEW YORK -- With elements of the go-go days re-emerging this week, culminating with Friday's big rise, it's important to recall the lessons of the recent past.
Hopefully most investors long ago got the message that it's paramount to ensure the truthfulness of information, and question the motives of those touting (or demeaning) stocks.
Nowhere is that issue more germane than in online chat rooms. In case anyone out there hasn't yet gotten the message about the need to be wary, here's another cautionary tale. The story also serves as a morality play about the wisdom of entrusting assets to money managers who happen to have impressive short-term track records.
Many of you, I trust, are familiar with the saga of NetSol International (NTWK:Nasdaq - news).
To recap: Shares of the developer of auto-leasing software soared from around 5 in late September to as high as 80 (intraday) in early March, before stumbling into the mid-teens recently after Barron's questioned the company's prospects and valuation. Simultaneously, the weekly postulated that if NetSol's valuation were a fool's paradise, so too was the heady performance of Blue Water Partners. About 40% of the Locust Valley, N.Y.-based hedge funds' assets are in the stock, Blue Water said in a May 15 press release.
What Barron's either did not know (or report) is that Jonathan Iseson, portfolio manager of the Blue Water funds, made over 100 postings about NetSol -- using the alias "3diesels" -- on Raging Bull from late July 1999 until early May 2000. (Thanks to TSC's Mark Martinez for pointing this out.)
As you might expect, the postings were mainly glowing.
One dominant theme was that NetSol was undervalued compared with erstwhile peers, as typified by this Feb. 3 posting:
With [Satyam Infoway (SIFY:Nasdaq ADR - news)] and [Infosys Technologies (INFY:Nasdaq ADR - news)] at record highs, the model works -- then NTWK should be valued at 120 in my own thought process. Look at [revenue] growth and the buzz of all the new biz they're getting. I am looking for a pop real soon.
Earlier postings hinted at corporate developments with the potential to goose the stock, such as this Dec. 20, 1999 missive:
I hear rumors of some major new deals in the very near term will give us powerful upside growth in revenues, earnings, potential, customer contact -- we're talking major league here!
On Jan. 2, NetSol announced the acquisition of Australia's Abraxas Software and with it, customers such as the Australian financing arms of GMC, Volvo, and Toyota.
Finally, postings such as this one from Dec. 12 discussed unnamed institutions buying the stock, as well as the boon likely to follow when NetSol moved from the over-the-counter bulletin board listing to Nasdaq's Small-Cap Market, which occurred in late December.
"Hearing that a large Middle Eastern institution is looking to buy a major amount of stock in NTWK. They better hurry before it's considerably higher - once Nasdaq approval comes then I believe many institutional accounts will jump in i.e. Janus
A Question of Full Disclosure
Iseson declined to speak on the phone but defended the postings via email Friday:
"I am surprised that there is an issue about 3diesels postings as it is well known that 3diesels has been my e-mail address and user ID," he wrote. "In fact, 3diesels is on my business card. I am well known as 3diesels."
Furthermore, Iseson pointed out that "3diesels" voluntarily disclosed being long NetSol in every post made on Raging Bull.
In his email, he wrote: "The postings reflect my optimism about NetSol's business model as a low-cost producer in a high growth industry, focus on comparables in the industry and repeatedly note purchases by Blue Water Funds, which are the subject of public filings."
I can't speak to "repeatedly," but Iseson pointed to a few of 3diesels' postings that refer to Blue Water (as "BW"). However, he refers to the firm in the third person and never -- near as I can ascertain -- fully disclosed his identity as Blue Water's manager.
"bw just [bought] 50,000 and is adding more!," 3diesels wrote on Dec. 28, 1999.
That prompted a question from another Raging Bull chatter who questioned how he knew, casting some doubt on Iseson's contention that he was "well known" as 3diesels.
The next day 3diesels replied: "I can assure [you] they [bought] that and are going to buy more today."
One for the Lawyers -- or the Moralists
The question, of course, is whether Iseson had a moral or legal obligation to disclose his true identity in case anyone was unfamiliar with his alias.
A Securities and Exchange Commission spokesman declined to discuss the specifics of the case, but said there is currently no law governing Internet chat rooms, specifically. However, "the way that people handle information or distribute information is sometimes the subject of SEC action," he said.
Baur Whittlesey, a partner at Ledgewood, a Philadelphia law firm specializing in securities industry issues, said Iseson might have a "serious disclosure issue," but acknowledged "there's nothing that prevents [a fund manager] from saying nice things about the company when he's buying."
Which, it turns out, is exactly what Iseson was doing.
Thus, Iseson can't be accused of engaging in a classic "pump and dump" play. Still, several sources questioned the prudence of publicly talking up a stock while acquiring more shares.
Talking Up the Stock
As of Oct. 1, 1999, Blue Water owned 516,000 shares, or 7.4% of NetSol's publicly traded stock, according to a 13G filing with the SEC. In early October, the stock was trading just above 5, making the stake worth about $2.6 million.
According to a Nov. 12, 1999 filing, the holdings had increased to over 861,000 shares, or 10% of NetSol. By then, NetSol shares had risen to around 7.
The stock skyrocketed soon thereafter, but that didn't stop Iseson from buying more -- essentially he was doubling up his bet, letting it ride, and pushing his luck.
By April 12, the fund owned 1.9 million shares, or 22.7% of NetSol, according to a 13D filing with the SEC. It was that day that NetSol shares took a steep plunge, falling from 60 1/2 to 44. Still, the stake was worth about $83.6 million, despite being down about 45% from its peak in early March.
The stock continued to fall thereafter, but Iseson kept buying. An amended 13D filed May 3 showed the fund owned 2.1 million shares, or 24.8% of the company. With the stock closing at 50 1/2 the day of the filing, the value of the position was about $106 million.
Then came the negative press.
By Friday, June 2, the stock closed up 9.6% to 17 13/16, meaning the stake had eroded to $37.4 million, based on the previously disclosed ownership.
Because Iseson apparently wasn't touting NetSol so he could unload shares at higher prices, speculation is he wished to increase the value of Blue Water's biggest holding to ensure a continuation of the fund's heady returns. (Or maybe he just didn't think there was anything wrong with making the posts.)
The Blue Water funds rose 111% in 1999 and were up 135% in 2000 through the end of April, when assets totaled $160 million, according to Hedgefund.net. (FYI, the fund group has been net short since the summer of 1999.)
Meanwhile, Iseson said the company was not aware of his chat room activities, although it is unclear whether Blue Water's clients knew.
NetSol executives declined to comment.
For whatever it's worth, Iseson said, via email, he remains bullish on NetSol, "notwithstanding repeated efforts by short-sellers to drive down the stock price."
Given his position in this thinly traded stock, he may have no choice but to continue to be optimistic, as exiting the position may be untenable.
Iseson hasn't made any posting on Raging Bull in about a month but, he declared, "3diesels has been and will continue to be my e-mail and user ID name."
At least now, everybody will know.
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Aaron L. Task writes daily for TheStreet.com. In keeping with TSC's editorial policy, he doesn't own or short individual stocks, although he owns stock in TheStreet.com. He also doesn't invest in hedge funds or other private investment partnerships. He welcomes your feedback at taskmaster@thestreet.com.
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