August 24, 2000 Some Pretty Lonely U.S. Stocks Call Hamburg Exchange Home
By CHRISTOPHER COOPER
Staff Reporter of THE WALL STREET JOURNAL
HAMBURG, Germany -- Some obscure U.S. companies, tired of being
ignored by American investors, are seeking relief in an unlikely place: the
tiny Hamburg Stock Exchange.
Driven to the brink of obsolescence by the far larger bourse in Frankfurt, the
Hamburg exchange now offers a new specialty: micro-cap U.S. stocks. A
new trading board, launched in January, currently features about 40
companies, all of them based in North America, few with any deep
connection to Europe.
Yet some of these stocks generate more trading volume in Hamburg than
they do in the U.S. The board, called the High Risk Market, is the product of
an unusual alliance between the exchange and a Hamburg-based
stock-promotion firm, World of Internet.com AG.
World of Internet, which operates a financial Web site called
Stockreporter.de (stockreporter.de), is one of many paid stock touts, offering
publicity and analyst reports about tiny U.S. firms in return for cash and
stock options. With its deal in Hamburg, World of Internet also offers clients
a stock listing there. About half of its 50 or so customers have signed up.
Who's Trading Here?
Typical of the companies on the exchange is Rhombic Corp., which
describes itself as a scientific research company working on, among other
things, a material the company says may one day replace silicon. The
company, founded in Nevada but based in Vancouver, British Columbia,
reported a first-quarter loss of $605,000 on revenue of $1,207. It is listed on
the OTC Bulletin Board in the U.S., where investors have shown little
interest.
In March, after Rhombic paid World of Internet $18,000 for "a package of
investor relations services," which included a listing in Hamburg, interest in
the outfit picked up. These days, some 200,000 Rhombic shares change
hands in a single session in Hamburg, according to local securities firm
Borsenmakler Schnigge AG, more than double the average volume in the
U.S.
"Peculiar, isn't it?" says Larry Horowitz, a spokesman for Rhombic. "The
Germans understand our company better than investors in the U.S."
Bids and Beer
For the Hamburg exchange, Germany's oldest bourse but one of its smallest,
creating the High Risk Market is an attempt to stand out from the crowd of
regional bourses, says Deputy Business Manager Kay Homan. "People need
to know that Frankfurt isn't the only exchange in Germany," he says.
Walking through the cavernous trading floor, all but deserted on a recent
midday, he passes a lone trader, who monitors a trading screen in between
swigs of beer. "We need to advertise, but we don't have any money," Mr.
Homan says.
At this point the new board is "pretty much a hobby," Mr. Homan says,
generating little income for the exchange. The bourse hopes it will grow into
something more lucrative.
The bourse doesn't claim to offer much oversight of companies listed on the
new board. Instead, officials say, they rely on the U.S. Securities and
Exchange Commission for policing. The name alone should make investors
wary, Mr. Homan says: "It's called the High Risk Market -- that should be
warning enough."
The market has proved a boon to World of Internet, which charges its
customers a fee, generally several thousand dollars, to list in Hamburg.
Not all of the companies are as happy as Rhombic with World of Internet's
services. Houston-based Adair International Oil & Gas Inc. also listed in
Hamburg in March but has yet to catch on with German investors. The
company, which lists an oil lease in Yemen among its assets, recorded a loss
of $1.14 million for the first quarter. Over the past year, the company's stock
price has fluctuated between a high of $3 and a low of about 12 cents.
Glowing Reports
As payment, World of Internet received 270,000 shares of Adair at 10 cents
apiece. In return, World of Internet's Stockreporter service provided a
Hamburg listing and a glowing analyst report, calling Adair a "strong buy"
and predicting a "conservative" price target of $3.90 a share.
Indeed, shortly after Stockreporter issued its report, Adair hit its 52-week
high. But the Hamburg listing has been a bust, says the company's chief
executive officer, Bill Adair. "Stockreporter pitched this as a way to build
active interest in our company, but ####, I haven't seen it," he says.
Other World of Internet clients listed here include Hartcourt Cos., Long
Beach, Calif., which has at various times been involved in gold mines, real
estate and Chinese Internet ventures. Winners Internet Inc., St. Augustine,
Fla., a former mining company that now says it is developing software, is
also listed. Other firms listed on the Hamburg bourse were recently delisted
from the Bulletin Board in the U.S., leaving them to trade in the so-called
Pink Sheets, where price quotes aren't readily available and regulatory
scrutiny is light.
Dennis Haas, the 29-year-old executive vice president and co-founder of
World of Internet, says he and two friends came up with the idea for the
business a few years ago when they were humanities students at a college
near Hamburg. Although Mr. Haas often appears as the author of the
analyst reports, he cheerfully admits to having scant business training.
Stockreporter relies on the companies to provide information for the reports.
"We don't have the time or the capacity to do all of the reporting," he says.
"We're not analysts."
Disclosure of the Arrangement
Generally, U.S. securities laws allow companies such as World of Internet to
provide paid analyst reports, so long as they disclose the payments. World of
Internet does so, behind a link on its Stockreporter Web site. Asked if he
thought all Stockreporter readers know of the disclosure, Mr. Haas shrugs.
"Maybe some people don't know," he says.
To arrange for its listings in Hamburg, World of Internet relies on
market-making firms, usually Borsenmakler Schnigge. That company's
Hamburg broker, Klaus Pinkernell, also sits on World of Internet's board of
supervisors.
Portly and pony-tailed, Mr. Pinkernell hunches over his computer in Berlin,
watching the trading on the Hamburg Exchange and occasionally exclaiming
at the screen. "Robbers!" he cries, as he watches a lowball bid for Rhombic
flash over the monitor.
The Market Maker
Mr. Pinkernell makes his money primarily through arbitrage between the
U.S. and German exchanges and by charging a small fee for executing
trades. Because Hamburg requires its companies to be sponsored by a
market maker, he also charges World of Internet about $2,500 per listing.
"Believe me, they charge their clients much more," he says.
Mr. Pinkernell takes an existential view of the High Risk Market and the
companies and people who trade there.
"People who buy stock in these companies, I wouldn't call them investors,"
he says. "I'd call them gamblers."
Write to Christopher Cooper at christopher.cooper@wsj.com
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