Careful John, SEC be watching you: "SEC Studies 'Momentum'Stock-Pick Sites on the Web
By REBECCA BUCKMAN
Staff Reporter of THE WALL STREET JOURNAL
Is Arthur Levitt posting stock recommendations on the Internet?
Investors who stumble upon the "Arthur Levitt's Stock Picks" site in the
crowded investment-club section of Yahoo (clubs.yahoo.com/clubs/
arthurlevittsstockpicks) might think the chairman of the Securities and
Exchange Commission had found a new hobby. Mr. Levitt, of course, says
he is not affiliated with the site, which promises "short-term gains on high
momentum stocks."
But the enforcement division of the SEC says it is investigating a host of
Web sites that offer daily or periodic stock recommendations designed to
generate "momentum" in certain stocks from quick-fingered day traders
and other investors. The often-artificial gyrations could in some cases be
considered stock manipulation, SEC officials say, particularly if Web-site
operators are profiting from the ups and downs themselves.
"We're aware of quite a few of these [sites], and we have quite a few of
them under investigation," says John Reed Stark, chief of the SEC's office
of Internet enforcement. "We're not blowing smoke."
Richard Walker, the head of the SEC's division of enforcement, adds that
such sites "have enabled people to artificially impact the market in
increasingly shorter periods of time ... this is an area of concern."
The SEC declined to name specific sites under investigation, but the
commission is expected to soon bring enforcement actions against some
momentum-trading operations. The commission currently isn't overly
concerned with the "Levitt" site because of the low number of visitors
there, people familiar with the matter say. But the SEC always keeps a
keen eye when the commission or the chairman is used to promote
business.
The SEC's probe is part of a broader examination into Wall Street's
rapid-fire trading crowd, including separate inquiries into various practices
at "day trading" firms and other types of stock-promotion sites. The SEC
last year brought actions against 44 companies and individuals for illegally
touting stocks online, alleging that many misrepresented companies'
prospects or didn't disclose payments for the touts.
Among those Web sites being examined now is Weeklypick.com
(www.weeklypick.com), according to Jason Sele, its founder. The site
boasts that "we don't buy stocks before we announce them to you!" --
even though the disclaimer says the site's founders "reserve the right to
choose to buy or sell stock in companies listed on this Web site without
notification of such transactions."
In an interview, Mr. Sele says SEC lawyers contacted him several weeks
back, asking him how he picked the stocks featured on the site, and
whether he bought shares before mentioning the stocks. Mr. Sele, an
Oregon computer consultant, says he doesn't buy stocks before the site
touts them -- "never have." The site, he says, "is just a hobby for me."
He says members sometimes pick the stocks on the site, and says he is not
seeking to send the shares into the stratosphere. Rather, he likens what he
does to public service. Indeed, his site is free to its 2,500 members.
What does he get out of it? "I might be clued into a stock," Mr. Sele says,
that he wouldn't have heard about. He adds: "I don't see anything that I'm
doing that would cause any concern."
Securities lawyers stress that many stock-pick sites, particularly those
using a consistent methodology to choose stocks ready to move, are
legitimate. Some stock-pick sites offer "honest opinions" or use "objective
formulas that pick out stocks that have good momentum," says Joseph
Grundfest, a professor of law and business at Stanford University Law
School.
"On the other hand, if people are establishing positions in these stocks,
then touting the stocks, and dumping the positions as the stocks run up,
then you've got an entirely different kettle of fish," Mr. Grundfest, a former
SEC commissioner, notes.
For its part, the sparsely visited Levitt-club site is a jumping-off point for a
link to what looks like a more ambitious momentum site called
ExplosivePick.com (www.explosivepick.com). This site, which appears
not to have been updated for a few weeks, promises to issue a
recommendation every Monday for a stock "which we believe is
overvalued or will have tremendous growth in the future."
It adds: "The stocks that we choose are based on tons of research from
our analyst staff."
Since May, ExplosivePick.com has touted eight tiny, thinly traded stocks,
none of which are now trading for more than $2 a share. Shares of the
latest pick, a money-losing health-care company called Derma Sciences,
now trade well below the "target price" from ExplosivePick of $2 to $3.
Derma Sciences declines to comment on the recommendation.
ExplosivePick.com didn't return e-mail messages seeking comment, and
there is no telephone listing for Planet Web, the Brooklyn, N.Y., company
cited as the registrant of the ExplosivePick.com Internet address. The
operator of the Levitt club-site also didn't identify himself on Yahoo and
couldn't be reached.
With all momentum sites, the main concern of regulators is that site
publishers could buy shares of companies before they tout them, and then
sell out once they generate enough momentum for the stocks to rise. This
activity, of course, would leave other investors holding the bag.
Such a strategy is a variant on the classic "pump and dump" scenario.
Then, stock promoters or insiders artificially bid up the price of a
stock-perhaps by paying for a tout in a stock newsletter, or releasing a
news release with false information -- and then dump their shares, taking
hefty profits. Tiny companies with few shares outstanding are the easiest to
manipulate.
But with the new momentum sites, companies and their promoters don't
even have to be involved, Mr. Stark says. The flood of activity unleashed
by the new breed of day traders buying the sites' picks can be enough to
goose the stocks. It brings the chances for stock manipulation "to a new
level," says Mr. Walker.
Many sites openly concede that their publishers could trade in the very
stocks they recommend. The extensive disclaimer on the
ExplosivePick.com site says people working for its operator, SQ
Enterprises, "reserve the right to buy or sell securities profiled in SQ at any
time."
It adds: "SQ will trade in these positions prior to stock-pick
announcement, and its administrators, representatives, or employees
reserve the right to liquidate or sell all portions of these positions
immediately after the stock-pick announcement." SQ couldn't be reached
for comment.
Without commenting on any site under investigation, Mr. Stark says
generally that "a disclaimer doesn't mean it's not a fraud." In their
investigation, regulators are examining potentially false and misleading
information issued as part of the recommendations, such as far-fetched
growth prospects or bogus business deals, which in itself could constitute
fraud. There is no indication whether or not the SEC is examining the
activities of ExplosivePick.com.
Momentum sites that acknowledge that their operators could buy and sell
recommended stocks include Daily Trader (www.dailytrader.com )and
DayPicks.com (www.daypicks.com).
At the Daily Trader, which advertises itself as offering "tomorrow's trades
today," the stock-picker is Charlie Radomsky, a retired stockbroker who
says he works out of his home in Clifton, N.J. Mr. Radomsky says he uses
several technical-analysis measures to select his daily stocks, which he
e-mails every night to Continuum Technology, a Fletcher, N.C., company
that runs the Daily Trader Web site. Many of Mr. Radomsky's recent
picks have been larger, better-known companies such as At Home,
Pairgain Technologies and Onsale.
According to Mr. Radomsky, the site's disclaimer is merely a legal
necessity: "As a broker, I made it my business for my whole career not to
buy the stocks I recommended, and the same is true now," he says.
Still, Continuum official Don Denman acknowledges that sending
thousands of subscribers (they pay $19.95 a month each) the same stock
pick could artificially move the market. To guard against that, he says, no
more than 250 subscribers ever receive the same stock pick.
"We were afraid that we might actually start influencing and changing the
numbers," he says. He declined to reveal the size of the site's subscriber
base.
One of the principals of Boston-based DayPicks.com, Matthew Connelly,
says his site also limits the size of its "user list." Still, when asked about
possible manipulation, he says: "We don't have concerns, because we
don't trade thinly traded stocks." As for whether he personally trades the
stocks he selects and puts on the site, Mr. Connelly said, "I'm not
prepared to answer that." |
