The Full Text: As Mr. Pink's fame continues to grow
Top Stories: Transaction Network
Confronts the Power of Suggestion
By Dan Colarusso
Senior Writer
9/22/98 4:09 PM ET
Options traders who deal in Transaction Network Services
(TNSI:Nasdaq) work in a sparse corner of the Pacific
Exchange, far from the bustling Microsoft (MSFT:Nasdaq)
options trading crowd or any of the San Francisco floor's
other marquee listings.
But three weeks ago, they got
caught in the crossfire of Internet
message-board gossip,
allegations of accounting
improprieties and an options
trader. And now, the matter has been referred to the Pacific
Exchange's surveillance department, the exchange confirms,
and may get passed along to the Securities and
Exchange Commission's enforcement division.
The episode illustrates the power of the Internet message
boards, which provide a way for posters to bash or praise a
stock anonymously and without disclosing ownership or
short interest. But it also shows another side of this
phenomenon -- what can happen to options market makers
caught in the middle.
On Aug. 10, TNSI shares were comfortably perched at 22
1/2 when a posting popped up on the Yahoo!
(YHOO:Nasdaq) TNSI message board about a July 17 alert
by the Center for Financial Research and Analysis, a
service used frequently by short-sellers to ferret out
companies with accounting problems. The posting alleged
that Transaction Network's revenue and earnings were
suspect because of a financial arrangement with some of its
customers.
After the posting, shares of the developer of point-of-sale
transaction processing, call-billing validation and fraud
control services began to slide. Within days TNSI traders on
the P-Coast's cavelike trading floor saw a retail customer
taking bearish options positions. To hedge themselves, the
crowd traders had to sell shares of the Reston, Va.-based
TNSI, a stock so thinly traded that this activity created more
downward momentum.
Between Aug. 17 and 21, TNSI puts were especially active.
Contracts that usually traded in five-contract lots were
getting orders for blocks of 25. At one point, the anonymous
options player put on a reversal (or conversion) in which he
bought puts and sold calls, a position equivalent to selling or
shorting the stock.
By creating the synthetic position as opposed to shorting
the shares outright, the person kept TNSI out of the public
short interest tables and out of the cross-hairs of other
shorts as the sentiment tide turned.
By Aug. 20, TNSI's stock volume soared to 340,000 shares
from its daily average of 85,000 and the stock plummeted
almost 13% to 15 3/4. On that afternoon, a posting appeared
on the TNSI board from Mr_Pink_esq, a frequent
message-board poster who often bashes stocks. His
moniker is similar to that of Mr. Pink, a famed bulletin board
participant who went after Chromatics Color Sciences
(CCSI:Nasdaq) earlier this year.
Mr_Pink_esq's posting cited the Center for Financial
Research alert, and he concluded that TNSI was "overvalued
and should be sold or sold short." Among the reasons were
"self-dealing management," concentration of sales to five
customers, insider selling and declining margins. The
poster's target on the stock: $8 per share. Ouch.
TNSI executives were worried. Telephone traffic between the
P-Coast trading crowd and representatives of the company
picked up as each side tried to determine what information
was driving the trading. The company's CFO, Tad Weed,
went to the wires to say that the Center for Financial
Research was wrong and that the service had admitted as
much to him.
Howard Schilit, who heads the center, declined to comment
on the details of his firm's TNSI report, but said, "Our report
is accurate as it stands. We stand behind our conclusion."
But nothing Weed could have said during the Aug. 20 stock
plunge would immediately replace the ground the shares had
lost, or the money the options market makers had lost
taking the other side of the TNSI options trades. It was ugly.
"When you couple a chat-room rumor with a thinly traded
stock, it's a recipe for disaster," one trader said, detailing
the kind of trading that proceeded for three days before
TNSI's big drop. "Whoever it is, he's very aggressive. He
came in with a 400-lot conversion, which means essentially
he was selling 40,000 shares of stock in one shot."
On a stock that trades 80,000 shares a day, that kind of
trading gets noticed, and the market maker who's also
selling shares to hedge goes straight into the blades. The
buyers of the stock realize that someone is more or less
desperate to unload a large chunk of shares and they offer
less and less until the seller has to give in. "They see you
coming; they're going to kill you," the trader said.
The stock's spiral ended Aug. 31 when it hit 14 1/2.
Transaction Network Services stock has recovered since
then: Tuesday it was trading near 27 3/8. Much of the gain
came from an announcement that the company had bought
some of AT&T's (T:NYSE) transaction services for $64
million.
Even that announcement was bashed by Mr_Pink_esq in a
Sept. 11 Yahoo! posting. "It is clear however that the
transaction is yet another attempt by TNSI to buy
customers, manufacture temporary earnings, and to
manipulate investors," the posting alleged. "Furthermore, the
humongous debt load that the company will take on could
ultimately result in the bankruptcy of the company."
Mr_Pink_esq's original posting probably received more
attention because of investors' focus these days on potential
accounting problems, thanks to Cendant's (CD:NYSE)
recent book-cooking bloodbath.
It is difficult to establish exactly what Mr_Pink_esq's goal
was in posting the Center for Financial Research report on
the Yahoo! message boards. But the postings of the July
report, along with some acerbic commentary, coincided with
the stock's sharp drop. The company itself believes that it
was a victim of an online drive-by slam it didn't deserve.
"It's tough for me to know how much weight they (the board
participants) have, but had we not had the AT&T transaction,
who knows what they would be doing to our stock," says
John McDonnell III, TNSI's general counsel.
The Center for Financial Research's report's most
inflammable citation alleged that TNSI "loaned $3.2 million to
customers during the three quarters ended March 1998. The
company refers to those loans as strategic investments
which facilitate the development of new accounts or extend
existing relationships. Although TNSI has not indicated the
exact nature of such loans, they appear to constitute
concessions provided in exchange for customers' agreement
to purchase a particular amount of products and services."
The center went on to say in the report that it questioned
"the legitimacy of any revenue and earnings recognized by
TNSI in connection with those purchases."
Karen Kazmark, TNSI's director of investor relations, said
the company's policy was not to respond to rumors and that
"we have fully disclosed any loans and investments this
company has made."
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