Fish just wanna be fed: "Chat-Room Guru's Stature Drops With the Technology Sector
By GRETCHEN MORGENSON
In the Arthurian legend, Merlin
was an enigmatic figure, an
enchanter and seer who advised
King Arthur — but a wizard with a
demonic side as well.
In the modern-day Internet lives
another enigma who calls himself
Merlin. A Scotsman whose real
name is Chris Rea, this Merlin has
spent the last two years
prophesying the moves of stocks
in Trading-places.net, a popular
chat room. From his homes in
Niles, Ill., a Chicago suburb, and
Marco Island, Fla., Mr. Rea has
beguiled hundreds of investors
with his electronically transmitted
claims of stock-picking prowess.
At the height of his popularity, the
subscribers-only chat room had
about 300 paying members,
making it one of the hottest such
sites on the Web.
But the Internet Merlin today finds
his magic waning. With the
Nasdaq composite index down
18.5 percent this year and many of
the highflying stocks favored by
chat room denizens in flames, Web
sites like his — which sprang up
by the dozens as technology
stocks boomed — are not the
hangouts they once were.
And their participants are not so
forgiving. Details of Mr. Rea's operation, disclosed by former employees
and customers and confirmed by other knowledgeable people, illustrate
how perilous it is for investors to log onto the Internet and trade shares
based on information they glean from chat room advisers they know
nothing about.
Documents supplied by these people and conversations with them reveal
an operation built on the kind of artifice that the Internet makes so easy.
Mr. Rea has misrepresented his own past and misled customers about
the identity of at least one of his site's moderators — employees who,
like Mr. Rea, make recommendations to buy and sell stocks.
He has populated his site with "ghosts," traders who wax enthusiastic
about the money they have made on Mr. Rea's calls but who insiders say
can be tracked electronically to Mr. Rea himself.
And, former colleagues and customers say, Mr. Rea has taken advantage
of his true believers to advance his own financial interests.
In an interview on Friday, Mr. Rea denied those accusations and said:
"The bottom line is, we call stocks on an hourly, minute-to-minute basis,
and our only intention is to offer an advantage and opportunity for our
members to make money. That is what we strive for and live for. If you
have people investing in stocks and they don't like the way it has gone, it
is very easy for them to point the finger."
For more than a year, Mr. Rea has been under investigation by the
Securities and Exchange Commission. Although Mr. Rea says the inquiry
has ended, he has acknowledged that the S.E.C. was looking at his
relationship with some of the brokers whose services he recommends on
his site. Mr. Rea declined to say how many members he has now, but
former employees say the number has declined to 50 or so.
Some members who quit recently said they did so out of frustration, with
significant losses sustained as they followed Mr. Rea's advice. As
membership dwindles, Merlin's ability to propel stocks on the wings of an
e-mail message has weakened, too.
Mr. Rea is not the only chat-room operator to draw the attention of
securities regulators. Of the many cases accusing traders of using the
Web to generate illicit profits, perhaps the highest-profile one was the
S.E.C.'s suit last January against Yun Soo Oh Park, better known as
Tokyo Joe. The commission said Mr. Park had operated a classic pump-
and-dump scheme, buying shares of stocks that he would then
recommend to participants in his chat room. As they rushed to buy, Mr.
Park would sell, the regulators said.
Mr. Park is contesting the accusations.
Still, the inner workings of an investing chat room like Trading- places are
not well known to investors. And to this day, much about Mr. Rea and
Trading-places remains shrouded in mystery; even the picture of Mr. Rea
that once appeared on the Web site has vanished.
The mist is clearing from many customers' eyes, however.
"I thought I was going to be part of an amazing team of professional
traders led by a man named Merlin who was a magic man at reading
stocks," said Alfie Shamroth, 45, of New York City, who was a
Trading- places subscriber from March 1999 until July of this year. "I
ended up finding there is no magic to picking stocks, and I found out that
I was absolutely, 100 percent on my own."
Mr. Shamroth, who described his losses as "well into six figures," said he
considered them "an entry fee for learning the game" and says he still
actively trades stocks.
A Few Embellishments
Christopher James Rea was born in September 1953 in Scotland, but he
has lived in the United States since at least 1990. Last year, when he was
trying to sign up investors in a Web auction site he hoped to start, Mr.
Rea stated in a private placement memorandum that he had earned a
degree in psychology from the University of Dundee. But officials at the
university said they had no record of Mr. Rea's attendance, and Mr. Rea
acknowledged Friday that the claim was inaccurate.
"That information is erroneous," he said, "and I'm trying very hard to
recollect how that was in there."
At varying times, Mr. Rea has told people that he introduced cellular
telephone technology to Britain, or that he was a designer of
sophisticated computer software, or that he was a professional securities
trader in London before he came to the United States. Mr. Rea now says
he was never registered as a trader.
Hyperbole aside, his life would become more mundane before he started
Trading-places. In 1995, he and his wife, Julia, had a home-based
company called Automail that produced mailers for automobile
dealerships. Automail and the Reas were sued early that year by a
California company that accused them of infringing on its copyrights by
reproducing an Acura mailer. Mr. Rea said that while he recalled there
being an out-of-court settlement in the matter, he would not provide
details.
In 1997, he started Trading-places , according to a description of the
company on the Web site.
As day trading grew in popularity along with the Internet, Mr. Rea and
Trading-places gained a following. By the late fall of 1998, when the
financial markets were still recovering from Russia's default on its debt
and the near collapse of the Long Term Capital Management hedge fund,
Trading-places had attracted about 30 traders. According to one of
them, Mr. Rea made good stock picks, and his customers made money.
During those months, Mr. Rea issued buy or sell alerts on about 10
companies daily.
As 1999 began, day traders across the nation found themselves aboard a
Nasdaq rocket ship that would soar beyond any of their wildest dreams.
Technology stocks, favorites of active traders because of their huge
moves during a single trading day, became an almost easy path to profit.
As Trading-places's membership grew, so did Mr. Rea's ability to move
stock prices. In early February 1999, for example, he recommended
shares of two discount brokerage firms, J. B. Oxford Holdings and
Siebert Financial. His throng of followers, by then more than 100, helped
to push Siebert from $19.13 to $49.50 in two days and to propel
Oxford from $12 to $25.75 in one session. Articles about Mr. Rea and
his chat room quickly followed in The New York Times and The Wall
Street Journal. Even though these articles were skeptical of Mr. Rea,
Trading- places attracted crowds of new traders.
About this time, former colleagues and customers say, Mr. Rea began to
change his modus operandi. Instead of making just a few calls on stocks,
he began issuing alerts on as many as 30 companies a day, advising his
customers to buy and sell much more often than he had earlier.
Olivier Asser of Odenton, Md., a former Trading-places moderator, said
he believed that the increasingly frenzied stock recommendations related
to deals Mr. Rea struck with brokerage firms to pay Trading- places for
generating trades.
Payment for customer orders is common among brokerage firms. But the
Securities and Exchange Commission requires such deals to be disclosed
to customers, and the National Association of Securities Dealers
prohibits the payment of such referral fees to unregistered individuals or
entities like chat rooms.
To support his assertion, Mr. Asser points to two e-mail messages from
Trading-places to brokerage firms discussing the terms of such deals.
One message, written last May to an electronic brokerage firm
specializing in futures, says that Trading- places will be paid $6 for each
round- trip trade — trades getting in and out of a position — by a client
referred by the Web site. The other e-mail message, to another futures
broker, confirmed discussions with Trading- places about the Web site
receiving $5 per round-trip trade by a Trading- places participant.
Mr. Rea said the arrangements were never consummated. If they had
been, he said, Trading-places would have registered to operate as a
so-called introducing broker, making the payments legitimate. All other
payments he receives from brokerage firms are for advertising on his site,
Mr. Rea said.
One of those firms, CyberCorp, a subsidiary of the Charles Schwab
Corporation, said late Friday that it was reviewing its relationship with
Trading-places.
Both Mr. Asser and Chris Curran, 34, a moderator at Trading-places for
nine months ending in July, said there were numerous "ghosts" in the
Trading-Places chat room — fictitious characters that made it seem as if
Mr. Rea's following was larger than it actually was and guaranteed a
cheering section for his recommendations. When paying customers left
the site, the former employees said, Mr. Rea sent his own messages using
their names.
Ghosts on the site, these people say, carry nicknames like Warlock,
Wizard, Nimrod, Viper, Stoned and Roxy. They could be seen as such
because computer-wise users of the Web site could determine the Web
addresses and server locations from which writers sent their postings,
according to former employees and members. "In too many instances," it
was the same location coming up," one former member recalled. "It was
an effort to deceive the members that there was a strong trading team
with all their fingers on the pulse of the stock market."
When asked on Friday if Warlock, Wizard and the others were people
other than himself, Mr. Rea said, "I think they're real people." But he
declined to put a reporter in touch with them, saying, "Several of those
names are not interested in speaking to you."
On at least one occasion, Mr. Rea gave a newly hired moderator the
nickname of a former moderator, leading members to believe that one of
the site's most popular and respected traders had returned to
Trading-Places.
Last March, in hiring Mr. Asser, Mr. Rea asked him to adopt the
nickname of a former trader, Skibum. In an e-mail message to Mr. Asser
confirming his employment contract, Mr. Rea said: "Under no
circumstances will you allow anyone at Trading Places know the `real
identity' of the nickname `skibum.' This is to protect the integrity and high
regard many traders have for this nickname."
Mr. Rea said that he used the old nickname for Mr. Asser because he
could not change his software.
Mr. Asser said he agreed to the ruse to get the job, which paid $2,500 a
month. But he said he quickly clashed with Mr. Rea on stock and market
calls and left the chat room on June 27. He has since become a vocal
critic of Mr. Rea, telling his story to regulators and posting criticisms of
Trading-places practices on other investing Web sites, like Silicon
Investor.
"Many T-P traders have been wiped out," said Mr. Asser, who, like Mr.
Curran, has gone on to form an investing Web site of his own. "They are
real people with real hopes and dreams and families to support."
The question of whether Mr. Rea was trading ahead of his customers, as
the S.E.C. asserts Tokyo Joe did, has also hung over the Trading- places
site. In a July message to his members, Mr. Rea said, "Neither Julia or
myself or T-P for that matter has traded one single stock since our
inception."
But there is reason to doubt Mr. Rea's claims. In an Oct. 20, 1998,
lawsuit against the Zapata Corporation, an obscure Texas company that
produced fish byproducts before announcing plans that summer to
become an Internet incubator, Mr. Rea said he had purchased 16,700
shares of Zapata in August and September 1998 — while he was running
Trading-places.
At first, Mr. Rea said he did not recall the Zapata lawsuit. Then he
added: "I do remember there were some attorneys who contacted me.
What I understood they wanted to know was how many shares we
owned." He said he had bought the stock well before Trading-places
began operating.
But court documents show that he bought 5,700 shares after the
Trading-places.net site started on Sept. 14, 1998.
This summer, Mr. Rea put a new disclaimer on his site. "Merlin does not
trade but affiliates of Trading- Places.net may have a position or effect
transactions in the securities described in our real time trading desk," it
said.
Mr. Rea said he posted the warning because he could not control his
moderators. "I had no choice," he said. "It's very hard to know what your
moderators are doing. I do not trade myself, under no circumstances."
Using the Hard Sell
The episode that hurt Trading- places members most, the former
employees and customers said, involved Mr. Rea's breathless and
incessant recommendations early last February of RMI.Net, a
little-known Denver company that provides Internet access and
e-business applications.
The story began unfolding last December, when Mr. Rea told Trading-
places participants that he was starting an Internet auction site to
compete with eBay. He and his wife needed financing for the start-up, to
be called realtimebids.com, and were looking for 10 investors willing to
put up $100,000 each.
"He said it would be the next big thing to hit the Internet," Mr. Curran
said.
In the private placement memorandum summarizing the business plan,
Mr. Rea said the Web site's infrastructure would be hosted by AIS
Network of Schaumburg, Ill. About two weeks later, on Dec. 28,
RMI.Net announced its acquisition of AIS, in a transaction worth $3.7
million. RMI issued 426,000 shares of its stock to buy AIS.
Mr. Rea recalled recommending RMI stock at around $7, where it was
trading at the beginning of February, and predicting that it would rise to
$90.
News of Mr. Rea's pick made it onto the RMI.Net thread on Yahoo.
"RMII upgraded yesterday by Trading-places with a $90 target price,"
one person posted on Feb. 8, using the stock's ticker symbol. "Buy now
before big move!!!!"
The next day, another Yahoo user posted this message: "RMI target of
$90 is no joke. Trading places has an over 90% rate of being at or higher
than target stock prices."
On the strength of Mr. Rea's table- pounding buy recommendation,
RMI.Net shares rocketed to $12.50 on Feb. 11 and even higher the next
trading day, Feb. 14. Then the stock began to fall, but Mr. Rea remained
enthusiastic, reiterating his optimism even in early June, with the stock at
around $3. The stock closed on Friday at $1.09.
Many Trading-places members say that they did not realize — and that
Mr. Rea did not point out — that two large shareholders of RMI.Net
had filed with the S.E.C. to sell 3.5 million shares of its stock on Jan. 21,
2000. The shares became free to trade in mid-April.
In July, when Mr. Asser posted that S.E.C. notice on Yahoo and Silicon
Investor, Trading-places members sent him e-mail messages saying that
they felt angry and betrayed at being advised to buy RMI.Net shares as
company shareholders were filing to sell. "I know one person who lost a
quarter of a million dollars in RMII alone," one former Trading-places
member said. "It was a disaster."
Mr. Rea said he had no ulterior motive in recommending RMI.Net
shares, explaining that he believed that the company had promise. But
Mr. Curran said Mr. Rea told him he had declined an offer from
RMI.Net to buy Trading-places for $12 million.
Douglas Hanson, chief executive of RMI.Net, said he was introduced to
Mr. Rea by an AIS executive but had talked to him only briefly. "He had
indicated at that time that he had a prospectus out on the street for a
business," Mr. Hanson recalled. But, he added, "there is no a relationship
between us."
Still Manning His Posts
Though he is under fire from former employees, and though his following
appears to have shrunk, Mr. Rea remains at his cyberpost, calling stocks
with ever greater frequency. Last Monday, he issued buy and short-sale
recommendations on 30 stocks before the market opened, giving his
characteristic call to arms: "Let's Rumble the Wall Street Jungle!"
But as one person at the site noted, the reaction was distinctly muted.
Few other traders chimed in.
For Merlin, the Internet Camelot was no longer so congenial a spot. nytimes.com |
