***Sorry folks***I'm not where I usually am and on a differenct system on a computer used
to invent the wheel. Let's try this:
By RICK BROOKS
Staff Reporter of THE WALL STREET JOURNAL
BRENTWOOD, Tenn. -- At first glance, Theodore Melcher Jr. and Shannon Terry seemed to have little
in common. Little except, federal officials charge, securities fraud.
The 51-year-old Mr. Melcher, a devoted family and career man, ran a thriving insurance-sales business.
And he helped mobilize a successful neighborhood fight to keep local youths, including his daughter,
from having to switch high schools.
Mr. Terry, meanwhile, was struggling to find his place in the real world. The 27-year-old former college
basketball star found his bank loan-processing job boring.
The unlikely pair did discover a common passion for stocks. So, from an office they shared for three
years in Mr. Melcher's house on a trim street in this exclusive Nashville suburb, they published a daily
newsletter that gained enough influence to trigger hefty stock moves. One favorite pick, Nyer Medical
Group Inc., jumped 56% in a single day last May after being mentioned in the newsletter.
Now, Messrs. Melcher and Terry are at the center of the Securities and Exchange Commission's first-ever lawsuit
over alleged securities fraud on the Internet, accused of manipulating the stocks of small companies.
Through SGA Goldstar Whisper Stocks, a $103.95-a-quarter newsletter distributed by fax and the World Wide Web,
their goal was to artificially inflate stock prices of small companies that were "bribing" them with free stock, the SEC
contends in its lawsuit. Another goal was to make big money: As those stocks rose, the SEC charges, Messrs.
Melcher and Terry sold their shares at a hefty profit.
In addition, some of the people who steered Messrs. Melcher and Terry toward obscure companies have been
accused by securities regulators of manipulating stocks and swindling investors. Two such sources are involved in a
criminal probe of bribes allegedly paid to more than 40 brokers around the country.
The SEC's civil complaint, filed in November in federal district court in Washington and amended about a month later,
already has led to the punishment of at least one of the other 11 defendants accused in the lawsuit. In late January,
Charles Huttoe, the former chairman of Systems of Excellence Inc., a McLean, Va., teleconferencing company that
allegedly issued free stock to Messrs. Melcher and Terry, was sentenced to 46 months in prison after pleading guilty
to securities-fraud and money-laundering charges.
Mr. Huttoe has agreed to assist federal authorities. And as many as four other people also may have pleaded guilty to
crimes and may be cooperating with the SEC probe, according to a person with knowledge of the matter.
Denying the Charges
Messrs. Melcher and Terry both deny the SEC's charges. In an electronic-mail message, Mr. Melcher, who couldn't
be reached by telephone, said of the SEC's lawsuit: "This entire matter has been an event I would not wish on my
worst enemy." Mr. Melcher's attorney, Michael Koblenz of New York, says his client has done nothing wrong and, as
proof, points to a boilerplate disclaimer at the bottom of each day's tip sheet: "Personnel associated with SGA may
own shares in the companies mentioned herein or may act as consultants thereto."
Mr. Terry declined to be interviewed for this story. His lawyer, Peter Anderson of Atlanta, says, "He is terribly
disillusioned. This is a real education for a 27-year-old kid."
The story of how Messrs. Melcher and Terry emerged at the center of the Internet investigation offers a picture of a
pair who unearthed and then raced to capture a special niche.
It isn't clear what led Mr. Melcher into the high-risk business of small stocks. He already had a lucrative career in life
insurance and qualified 18 years in a row for the Million Dollar Round Table, a select club for agents who sell at least
$1 million in policies. He paid $289,500 for a house in Brentwood's Crockett Cove neighborhood in 1987, according
to real-estate records.
When Mr. Melcher bought a tiny research firm in 1991, incorporating it later as SGA Goldstar Research Inc., he
focused on companies largely neglected by Wall Street. And he urged his readers to get in on the ground floor. A
1993 report about Malvy Technology Inc., the developer of an antitheft car lock, said: "We think the stock is
positioned for a gigantic move."
As Mr. Melcher's following grew -- to more than 700 subscribers last year, he told the SEC -- so did the workload. In
1993, he asked a former summer intern, Mr. Terry, to return as his full-time assistant.
Fascinated With the Market
Mr. Terry, a marketing and business-management double major at David Lipscomb University in Nashville, jumped at
the chance. The loan-processing job he held at the time didn't fit his goals. "He had a fascination with the [stock]
market," says his lawyer, Mr. Anderson, and hoped to become a broker or analyst.
The new partners quickly settled in. Mr. Terry fielded phone calls, took subscription orders and designed versions of
the newsletter. Mr. Melcher did almost all the research. Hundreds of packets of news releases, financial statements
and promotional videos arrived in the mail every week from fledgling companies hoping to make it into the newsletter.
The routine was grinding. A neighbor says Mr. Melcher went to his home office before dawn and sometimes didn't
quit for the day until long after dark.
But the hard work was paying off. By 1995, the two-man firm had established an impressive following among traders
and investors with the stomach for high-risk stocks. Last summer, for example, Grandma Lee's Inc., a Canadian
restaurant chain, more than doubled in the month after it was first pitched by the SGA Whisper Stocks newsletter.
Mr. Terry was paid $500 a week plus 10% of subscription revenue. The firm had annual revenue of close to
$250,000, says a person who provided commentary for the on-line version of the newsletter.
But the SEC contends that Messrs. Melcher and Terry essentially supplemented their income by taking shares from
the companies they were writing about, and then selling while telling their readers to buy. Mr. Terry made nearly
$350,000 selling shares of seven such companies, according to an SEC attorney. In a deposition, Mr. Terry admits
receiving stock; his attorney confirms he sold some of the shares later, but maintains that all the transactions were
legal.
Regulators also allege that all the freebies clouded the pair's judgment or, even worse, inspired them to commit fraud.
Consider the case of Systems of Excellence, known on Wall Street by its stock symbol, SEXI. In December 1995, a
public-relations consultant for the teleconferencing company sent a packet of information about the company to
Messrs. Melcher and Terry. "Ted threw it in the trash," Mr. Terry says in his deposition.
Main Chance
But only a month later, with the stock near 45 cents a share, SGA Goldstar Whisper Stocks issued this opinion: "We
truly believe investment in this company is a once-in-a-lifetime opportunity. We think the stock can easily increase in
value ten times from these levels." The newsletter went on to mention Systems of Excellence in about 90 later issues.
What changed their minds so quickly?
The SEC contends it was 400,000 shares of Systems of Excellence stock given to Messrs. Melcher and Terry by Mr.
Huttoe "as compensation for this coverage," the lawsuit claims.
They didn't keep the stock for long. Last February, Mr. Terry's brokerage-account statements indicate, he started
selling just days after depositing 100,000 shares in his account. In two days, he sold 75,000 shares for a profit of
$53,878. In May, after the tip sheet pushed Systems of Excellence for 10 straight days, he sold 15,000 more shares
for a $29,282 profit.
The SEC believes Mr. Melcher engaged in the same selling, but says he hasn't yet turned over his trading records
that have been subpoenaed by the agency.
The SEC alleges in its suit that Messrs. Melcher and Terry illegally failed to disclose stock that they received and
subsequently sold. Mr. Anderson responds that Mr. Terry was trading based not on what SGA was writing, but on his
own technical analysis. The attorney says: "If a stock drops 20% from where he had purchased it, he typically gets
out."
Readers also weren't told that the tiny research firm used as sources at least two public-relations consultants who
have had run-ins with securities regulators. In a deposition filed in a civil lawsuit against Malvy Technology (now called
Metal Recovery Technologies Inc.), a man named Harcourt Wiltshire claims that SGA Goldstar Research "would
confer with Gary Salter as to the substance or the activities of [Malvy] as a basis for their articles."
Messrs. Wiltshire and Salter are under investigation in Florida in connection with a conspiracy to bribe brokers to tout
certain stocks to their customers. Mr. Wiltshire pleaded guilty last April to conspiracy in connection with some
$300,000 in bribes, and federal prosecutors in Florida say he is cooperating with their continuing investigation. He
declined to comment for this article. Mr. Salter, who couldn't be reached, hasn't been charged.
Mr. Melcher also has ties to a public-relations firm that got 1.8 million Systems of Excellence shares from the
company near the time when the newsletter was recommending the stock. The SEC and Mr. Terry say Mr. Melcher
was an official of Diversified Corporate Consulting Group, the firm that got the free stock. An attorney for Diversified
wouldn't comment.
Diversified itself is surrounded by controversy. It is part of a separate SEC probe that began in January of Quigley
Corp., a Doylestown, Pa., developer of a lozenge that the company claims abbreviates the common cold. And its
managing director, William Calvo III, was disbarred in Florida after the SEC won a suit accusing him of taking part in a
scheme using fictitious loans as part of a stock offering.
In his deposition, Mr. Terry says that he was concerned about potential conflicts of interest and disclosure problems,
but that Mr. Melcher assured him there would be no problems. "I have all but a legal opinion," Mr. Terry quotes Mr.
Melcher as telling him.
Closing In
By last fall, though, the SEC was starting to close in on Messrs. Melcher and Terry. The reason: Investors who
followed their advice were complaining about Systems of Excellence. Some disgruntled investors, after waiting for
months for the company to land big contracts, started to think it was a fraud.
In October, fearing that Systems of Excellence had made misleading statements about its financial condition and
issued tens of millions of unregistered shares, the SEC halted trading of the stock. Meanwhile, the newsletter kept
urging readers to buy the stock, the SEC claims, and failed to report its fears that the company's claims weren't true.
Mr. Terry now admits that he and Mr. Melcher should have told investors to dump the stock sooner but says they
decided instead to give Systems of Excellence "the benefit of the doubt."
His attorney, Mr. Anderson, says Mr. Terry doesn't believe that his boss, whom Mr. Terry sees as a "father figure,"
intentionally misled him or subscribers. Instead, he blames Mr. Huttoe for carrying out an enormous fraud and then
concealing it from everyone.
And for his part, Mr. Melcher insists he, too, was a victim. "Unfortunately for me," he wrote in his e-mail message to
The Wall Street Journal last week, "I made a few bad contacts in what I am fast finding out after only four years in the
stock-market newsletter business... . that the securities business seems to be riddled with people out to commit
fraud." |
