For a Fee, Analyst Mark Bergman Will Hype Your Company's Stock
Santa Monica, California, April 28 (Bloomberg) -- Analyst Mark Bergman forecast a rosy future two months ago for Environmental Solutions Worldwide Inc.
The Canadian company's ``revolutionary'' process for curbing toxic auto emissions will let its catalytic converters ``dominate a lucrative'' market as production begins this year, he predicted.
Environmental Solutions spurted to 7 3/8 from 4 7/8, with 1.5 million shares changing hands a day, after it issued a press release Feb. 25 saying Bergman's firm, Access 1 Financial of Santa Monica, California, had begun ``coverage'' of the company with a ``buy'' recommendation. Internet bulletin boards soon began circulating the optimistic report.
Then, on March 13, Teodosio Pangia -- the man Bergman says paid him $25,000 and 30,000 shares to write the report -- filed with the Securities and Exchange Commission his intention to sell 3,170,975 shares of Environmental Solutions, his entire holding.
The sequence of events -- shares of the Richmond Hill, Ontario, company now trade at around 2 -- makes it seem like a ``classic pump-and-dump'' operation to Alan Bromberg, professor of law at Southern Methodist University in Dallas.
Buyers were influenced by a seemingly independent analyst's report to bid up a stock, Bromberg said, while insiders sold at the inflated prices.
This may be more than just unethical. ``If a company's press release about a research report fails to disclose the report was bought and paid for,'' says Valerie Caproni, director of the SEC's Pacific regional office, ``it's probably securities fraud.''
Disclosure
Environmental Solutions isn't alone in not providing full disclosure. Since December, Access 1 has issued reports on a score of small companies; typically, the companies and their investor relations representatives then draw attention to the reports via electronic press-release services as if they'd been the work of an independent analyst, not a paid consultant.
``Analysts are bullish on C-3D Digital with Access 1 Financial issuing a strong buy recommendation,'' began one such letter.
Similarly, Fusion Fund Inc. announced that Access 1 had ``initiated coverage'' and was recommending it as ``unique within the Internet/technology incubator market.''
Sonicport.com also said Access 1 Financial initiated coverage, quoting the report's description of itself as ``an aggressive and innovative Internet marketing company'' and ``an emerging industry leader.''
In style and content, Bergman's reports mimic those of traditional stock analysts -- ``We recommend the accumulation of Environmental Solutions Worldwide Inc.'s shares for appropriate investors'' -- though he's hardly an impartial evaluator of a company's prospects.
As Bergman's brochure to potential clients puts it, his analyst reports are designed to have a ``potentially substantial impact on your company's valuation.''
Bergman, 49, readily agrees he's not a stock analyst but a public relations consultant. ``We're a PR firm,'' he says. ``We get paid for telling company stories. That's what we do for a living.''
Manipulation?
In the case of Environmental Solutions -- a three-year-old start-up with no revenue or manufacturing operations -- shares began rising even before Bergman's report was published: for days, word had spread over the Internet of an imminent analyst's report that would highlight the company's excellent prospects.
As a case study, Environmental Solutions seems ``consistent with a short-term manipulation of the market for the benefit of a selling insider,'' said John Coffee, a Columbia University law professor.
After the stock's run-up and decline, the company removed Bergman's report from its Internet site. Chief Executive Bengt Odner said he was stunned when an SEC attorney called to say the company's Web site featured the report, which projected $35 million in sales by year-end.
Odner said he hadn't previously seen Bergman's report, much less commissioned it.
``The projections are wrong,'' said Odner, who became CEO last fall. ``It's absolutely appalling. I know we're not going to have production this year.''
Remarkably, the rejection caused Bergman to dispute the CEO, insisting that his information was accurate. ``The projections absolutely, 100 percent came from the company,'' he says. ``We don't pull numbers out of a hat.''
To emphasize his confidence, on March 27 Bergman upgraded Environmental Solutions to an `aggressive strong buy.'
``Contrary to the company's announcement,'' he wrote, his original report ``was officially approved and Access 1 Financial is positive regarding the company's future.''
Controversy
So where did the analyst get his ``official'' numbers? Bergman says Pangia, a 41-year-old Canadian business consultant, provided the key insights and information.
Not unexpectedly, Ted Pangia was upbeat about the company. In January 1999, he was among insiders who exchanged the rights to a catalytic converter patent for a shell company that became Environmental Solutions. Bruno Liber, the catalytic converter's 77- year-old inventor, received 5 million shares.
Pangia's 11-percent stake of 3.1 million shares made him the company's second-biggest holder. Pangia retained his restricted stock a year, as required by law, and now is gradually selling all his shares. Pangia says he's ending his relationship with the company.
``I didn't want to tarnish the technology of the company,'' he said, ``so it didn't make sense for me to be part of the management.''
Pangia is no stranger to controversy. In 1997, he resigned as chairman and chief executive of Ecology Pure Air International Inc., another Canadian company with auto pollution-control technology. He left after the company's board accused him of diverting more than $1 million to his own account. He denies wrongdoing.
`Shocked'
As for Bergman's controversial report, Pangia says he provided only ``general'' information and denies ``unequivocally'' that he paid for it. ``I was shocked,'' says Pangia, ``that the report came out with these aggressive numbers.''
On his part, Bergman says he's upset that Pangia filed to sell shares while Access 1 Financial was promoting the company's stock. ``I guess we were used,'' he says. ``It looks pretty obvious now.''
Bergman says he worked as an analyst at D.H. Blair Investment Banking, at Hambrecht & Quist, and Hampton Porter of San Diego, among others, before starting Access 1 as a financial public relations service.
Not all Bergman's clients disguise the paid nature of Access 1's work. As an exception, Rick's Cabaret International Inc. -- which owns topless bars and ``adult'' Internet sites -- announced that it ``retained Access 1 Financial as [an] investor relations firm to broaden the Company's following with institutional investors and fund managers.''
While Bergman as a rule discloses compensation in his reports -- albeit at the end and in agate type -- he says he omitted this ``by oversight'' in the original Environmental Solutions report.
Bergman concedes ordinary investors can get ``confused'' over his company's services. ``I think that could easily be remedied with a rule that companies have to disclose that they've paid for the research report,'' he says.
In any event, companies might be re-thinking Bergman's role in their business strategy. Shares of all 23 companies for whom his firm issued ``buy'' recommendations are now trading for less than on the day his reports came out.
Apr/28/2000 9:20
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