anatomy of a scam: from money.com regarding internet hype
November 19, 1998
Anatomy of a scam
How an anonymous tout helped ignite a run on AvTel shares,
and how they collapsed
By Ryan Donmoyer
Two weeks after the SEC crackdown on Internet fraud threw the spotlight on how
grifters work classic cons on the Web duping eager investors, Money.com
presents a case study of one curious episode that rapidly drove up the price of
an obscure stock until Nasdaq pulled the plug. There is no evidence of
wrongdoing by the company involved. But the meteoric rise and fall in a single
day of an obscure, unprofitable California network provider called AvTel
Technologies amid vague claims of a phantom business advantage underscores
the dangers of trading in a hyperactive and highly technical market, while also
reminding us of the valuable role that established markets can play in
rationalizing fast-moving trading.
It started at 10:26 a.m. on November 12 when someone calling himself
"dennismenis99" posted the same message in a dozen Yahoo! Finance
discussion groups devoted to the hottest Internet stocks on the market.
"Hot news: AVCO going up! Next EBAY!" the poster declared in the
eBay board, comparing AvTel (NASDAQ:AVCO), a provider of
broadband network services for individuals and corporate customers
based in Santa Barbara, Calif., to the Internet auction site that has
gained more than 100 points in the last month.
Within 20 minutes, "dennismenis99" had posted virtually identical
messages in discussion groups devoted to other high-flyers such as
Lycos, Egghead Software, K-Tel International, RealNetworks, Inc.,
Onsale, Dell Computers, CDNow, Yahoo, Ciena, Think New Ideas, and
Infoseek, hyping AvTel as an Internet stock.
Each message repeated the same details from an overheated AvTel
press release. Touting the launch to about 10,000 Santa Barbara
customers of high-speed Internet access over Asymmetric Digital
Subscriber Lines (ADSL), it declared: "ADSL is a new modem-based
technology that provides a dedicated connection to the Internet that is
up to 50 times faster than conventional modems.
"It works on an existing phone line and allows the sending and receiving
of voice and data simultaneously. The user is always just a click away
from the Net with no wait and no busy signals." The press release
carried the headline: "50 Times Faster Than Conventional Modems?
Now That's Fast!"
With the stock market already blindly consuming everything
Internet-related, this statement was like throwing raw meat into a feeding
frenzy of wolves.
By noon, the stock had jumped from just over $2 a share to nearly $10
per share. By early afternoon the stock was in the 12s.
Then, shortly after 3:30, the company was mentioned favorably on
CNBC. AvTel rocketed to $31 a share at the close.
Late in the afternoon the short sellers arrived. (Short sellers borrow
shares of a stock from brokers, speculating that its price will decline, then
make good on the borrowed shares with new ones purchased at the
lower price.)
Almost immediately the short-sellers were taunting the gullible about the
inevitable crash and flooding the boards with messages of doom, trying
to drive the price down.
At 5:40 p.m., NASDAQ finally pulled the plug, halting trading and
requesting additional information from the company. But not before its
stock price nudged up to $38 in after-hours trading. All told, in just eight
hours its stock price had risen 1,278 percent on a volume of 3.6 million
shares, compared to a daily average of 3,300.
NASDAQ's big concern: AvTel's press release, which misled many
investors, perhaps unintentionally.
While ADSL is indeed faster than conventional modems and allows
simultaneous transmissions of voice and data, it is not "new" technology
- many companies are testing it around the world - and AvTel does not
have a proprietary interest in its development.
The company neither makes the modems nor seems to have plans to
deploy the technology beyond its very limited market in Santa Barbara.
By that standard, any company experimenting with the ADSL technology
could have issued the same press release, and with no greater
prospects of future windfalls should ADSL catch on big.
When NASDAQ allowed trading to resume on Monday, November 16,
AvTel opened at just over $3 per share, almost back to where it started
the previous Thursday, and barely up from its 52-week low of $1.75.
During the day, it enjoyed a brief dead cat bounce, kicking the stock's
value into the low teens, but then began a slow, steady skid. On
Wednesday, it closed at 8 23/32.
The NASDAQ will neither confirm nor deny whether it is investigating,
although at least three law firms have filed class action lawsuits against
AvTel. For its part, the company says it has no statement on the bizarre
affair.
In many ways, the AvTel story has the signs of a classic
pump-and-dump, where scamsters overhype a stock, often because
they want to dump it, using high pressure sales, illusions of investor
interest and bogus information.
Just when the individuals start buying, driving up the price, the con
artists dump the shares they bought at much lower prices, often sending
the stock price back to zero. Face it, anyone who owned a pile of $2
shares could have cleaned up big that day.
In this case, the mega-hyped Internet stock environment and AvTel's
star turn on CNBC launched the stock into the stratosphere, but it took
the volatile combination of the oddball press release, an army of
investors hungry for a piece of an Internet superstar and some
suspicious, still unidentified hucksters loitering in cyberspace to light the
rocket.
How could so many investors be fooled by such a thinly-veiled hype,
spun by an anonymous poster with a frankly ridiculous handle?
"A single person can easily create the illusion of widespread interest in a
small, thinly-traded stock by posting a series of messages under various
aliases," the Securities and Exchange Commission warns ominously in
an October press release on how to spot Internet stock scams.
While "dennismenis99" may or may not have been just one person,
technology made it possible to target his intended eager audience
narrowly and instantaneously, homing in on investors who were already
focused on other stocks whose value was power-shifting. (Money Daily
tried to contact "dennismenis99", but he does not have a Yahoo!
Finance profile, and e-mail to a suspected alias bounced.)
The bulletin boards where investors eagerly trade tips on hot issues
have the potential to greatly influence the performance of individual
stocks, as was clearly (and painfully) demonstrated in the AvTel disaster.
Like eBay before it, the number of messages in the Yahoo! Finance
discussion group devoted to AvTel has exploded by nearly 1,200 new
messages after poking along previously at just a few per month.
Many of the early messages last week were euphoric as the stock took
off, then confused when the NASDAQ pulled the plug, and dismayed
when the stock fell back to earth. But at the same time, hundreds of
them were clearly opportunistic, shamelessly touting other stocks as -
you guessed it -- "the next AVCO." The board was at times abusive,
littered with misinformation about the NASDAQ's actions, the business of
stock trading, and the company itself.
The moral of the story? At a time when a stock trade is just a click away,
a lot of naive and over-eager investors -- and some market makers --
took a bath when they got caught up in the momentum of a stock simply
because someone attached the word "Internet" to it.
With Web stocks igniting again this week on news of rapidly-growing
online retail sales, the message boards are once again abuzz about the
"next" eBay and Amazon.com. Of course, on other Internet discussion
groups, they still argue that Elvis lives and UFOs exist. How much would
you bet on those promises? |
