Top Stories: The Longs and Shorts of Egghead: Riley Capital Fires Back
By Gregg Wirth
Staff Reporter
7/15/98 4:01 PM ET
Louis Riley, sole proprietor of the eponymous Riley Capital Research, is in a
snit. After issuing a press release that at least one news outlet credited
with helping the current run-up in Egghead.com (EGGS:Nasdaq) -- a stock Riley
said he both owned and had call options on at the time -- Riley is threatening
to sue those who accuse him of stock-hyping.
In a series of almost identical letters emailed this past weekend to various
members of Shark Attack, an online investment message board on America Online,
Riley threatens lawsuits against several members, including one Egghead short-
seller.
This is just the latest altercation that is part of the eternal quarrel
between longs and shorts. Though the subject keeps changing, the fierce
exchange between these ideologically and financially opposed factions rages
on. While the Internet has proved to be a formidable weapon for both sides in
this and other skirmishes, the medium also provides a rare public window into
this particular brand of guerilla warfare. The Egghead exchange has it all:
accusations of manipulation, threats of lawsuits and a wildly gyrating stock
price.
In an email to TheStreet.com, Riley says he is a victim of a smear campaign.
"I have been working very hard to build my research business and it would
distress me greatly to see my reputation soiled by an individual who obviously
has ulterior motives," Riley writes. Riley, who has issued a number of press
releases in the past outlining his investment opinions, declined to be
interviewed by phone for this story.
In letters emailed to at least five members of Shark Attack, Riley says he has
been defamed by his critics' accusations that he hypes stocks for his benefit.
In the letters, Riley says, "I absolutely believe all of the facts and
forecasts that I have published in every one of my research reports," and says
he has been "economically harmed" by such accusations and is considering a
lawsuit.
Several Shark Attack members allege Riley uses an illegal practice called
"pump 'n dump" in which he talks up a stock and then sells as it rises.
However, they said they have no proof that Riley has sold shares of Egghead or
any of the other stocks he has recommended in the run-up in price that has
sometimes followed his press releases.
Floyd Schneider, who posts on Shark Attack under the name "Pontz27," admits he
is the short-seller whom Riley mentions and doesn't hold back his opinion of
Riley Capital. "It's a one-man bucket shop," he says. Schneider, who says he
dabbles in various strategies while day-trading, is a regional vice president
of mortgage originations at Real Estate Mortgage Network in Rochelle Park,
N.J.
Schneider says Riley's recent activity in Egghead has raised the ire of
several members of the online discussion group, himself included. Egghead ran
up around 35% in the three trading days since Riley issued a press release
last Thursday praising the stock and lavishing a target price of 85. In fact,
a CBS MarketWatch report on Friday credited Riley's release for much of the
late week's run-up in Egghead's price. The stock had climbed about 200% in the
past several weeks prior to Riley's release. In the release, Riley said he
"holds positions consistent with the above (Strong Buy) rating."
Before all the animosity, Riley was just another prolific member of Shark
Attack, moving among several online message boards and eventually joining
Stock Investor Trading News, a stock-picking Web site administered by another
AOL member, David Barney. At SITN, Riley got a lot of attention by writing a
press release recommending Ktel (KTEL:Nasdaq) -- with a suggested target price
of 100 when it was trading around 28 -- about a week after the company's stock
began to surge in April's Internet feeding frenzy. (Ktel did eventually reach
around 80 before splitting 2-for-1 on May 8. The stock has headed lower since,
hitting 11 today.)
Barney and Riley split over Riley's next recommendation, Advanced Health
(ADVH:Nasdaq), according to several Shark Attack members familiar with Riley's
history. Barney declined to put it on SITN, and Riley went out on his own.
Barney would not divulge the details of his relationship with Riley, other
than to say that "Riley does not work for us." Barney did not respond to a
request for more information.
In his resume, Riley says he established Riley Capital in 1996, after leaving
a first vice president's post at Rauscher Pierce Refsnes' Houston office in
1995. A spokeswoman at Dain Rauscher (the new entity that includes Rauscher
Pierce) confirmed Riley worked there for less than nine months in 1995, saying
his title was "investment executive," the firm's term for a broker. Before he
worked at Rauscher Pierce, Riley was a vice president for Oppenheimer and a
registered rep -- another term for broker -- for Bear Stearns, Smith Barney
and Merrill Lynch.
What is particularly irksome to Schneider and the rest of Riley's detractors
now is that Riley appeared to have hinted in a message on Shark Attack that he
was planning to write the Egghead press release shortly after he bought soon-
to-expire call options on the stock. According to a July 6 message in Shark
Attack, Riley disclosed that he had bought 100 Egghead July 15 calls at around
$68.75 per contract. While Egghead seemed well on its way upward at the time
of the trade, the stock sputtered early last week and the price gains slowed.
Three days after the option trade, enter Riley and his 85 target price. The
stock turned again wildly upward, closing Monday at 26 1/8, up 4 11/16, on
35.7 million shares traded. (Tuesday, however, the shorts regained ground as
Egghead slid to 23 27/64, down 2 45/64, on about 21 million shares traded.)
The call options surged in one week. The July 15 calls were trading Monday at
11, or $1,100 per contract -- roughly 16 times what Riley said was his
purchase price -- because of the run-up in Egghead's stock price. Had Riley
wanted to exercise the options profitably, he needed the stock to climb above
the 14 13/16 price it closed at on the day of his purchase. In fact, Riley
needed the price up to move within the 10 trading days after his purchase or
else the calls would have expired worthless at this Friday's expiration.
Schneider calls Riley's July 6 post an O.J. Simpson-esque "bloody glove." In a
nine-page fax to TSC, Schneider outlines what he calls proof of Riley's
nefarious intentions. In the July 6 post, Riley discloses that he bought the
calls, then writes that perhaps he should issue a press release to alert
investors to Egghead. "Nahh, that would be wrong," Riley writes. Three days
later, Riley issued the release.
Schneider said he bought Egghead put options on the same day as Riley's post.
Schneider declined to say how many or at what strike price his puts were.
Schneider bought the puts because he believed Egghead was heading down and
assumed Riley's attempt at hyping the stock would be quickly discovered, he
said. Now, however, he wants to get the word out, faxing Riley's message and
press release to several news outlets, including TSC. "These are all facts!"
Schneider exclaimed. "I did not create this!" Schneider has made numerous and
much stronger attacks against Riley both online and offline.
The back and forth between Riley and Schneider eventually spurred Riley to
threaten lawsuits against Schneider and several of his supporters this past
weekend. Jim DePorre, who hosts Shark Attack under the moniker "RevShark,"
declined to comment on Riley, citing the possibility of lawsuits. DePorre
recently purged the Shark Attack's message archive of many of the pro and con
messages concerning Riley, Schneider and Egghead.
Undeterred, Schneider and Riley were still at it this week. In a message
posted on Shark Attack yesterday, Schneider bragged that he got a "major Web
site" (apparently TSC) interested in the story, and the same day was on
Silicon Investor making his case against Riley. Some of the investors and
Shark Attack members caught in the middle are growing tired of all this, says
Penny Willhite, a Shark Attack member. While no fan of Riley (she is one of
the site members threatened by Riley's lawsuits), she isn't fond of
Schneider's tactics either. "Floyd should just shut up," she says. "People
want to go back to talking about stocks."
As to Riley's possible lawsuit against her and others? "It's just a cheap
threat," Willhite says. "Am I worried about it? Heavens no." |
