Investors, Beware the Press Release
The right spin--or even a lie--can make stock prices soar
On Apr. 8, the Securities & Exchange Commission filed a suit against a Los Angeles tree trimmer, Stephen Sayre, for posting fake press releases on message boards on behalf of eConnect, a micro-cap Net stock. The suit alleges that Sayre put out phony ''buy recommendations'' under the name Independent Financial Reports and posted them on Internet message boards. Those press releases were also distributed by Business Wire, a paid Internet news service, and ended up on news services like Bloomberg and investor Web sites like Marketwatch.com and TheStreet.com (TSCM). The stock traded as high as $22 a share on Mar. 9 and is now trading at less than $1 a share.
''We're pleased that the SEC is helping us guard information we're distributing to consumers,'' says a Business Wire spokesman. An eConnect spokesman denies that the company has any relationship with Sayre.
FAST AND LOOSE. Once a relatively mundane communications device, a press release now has the might to dramatically drive the price of a stock. As a result, more companies are designing press releases with that goal in mind. But it's not just edgy or pushing-the-truth headlines from lesser-known companies that are designed to spike share prices. Stock analysts say established companies are also playing fast and loose with press-release language, especially those involving earnings reports. They may exclude entire unprofitable subsidiaries, or leave out key information--such as certain losses--in order to appear rosy to investors. This has captured the SEC's attention. ''While we don't regulate press releases, we are on guard for fraudulent and manipulative statements,'' says Chris Ullman, an SEC spokesman. But even the SEC admits this is a gray area and difficult to police.
To be sure, stocks have always risen or fallen on news, but the Internet has fundamentally changed the way news is delivered. Average investors now get ''news'' over the Internet as soon as--or in some cases before--it is posted on traditional wire services such as Dow Jones & Co. (DJ) or Reuters Group PLC (RTRSY). But often the ''news'' is merely paid press release distributed through Internet news services such as PR Newswire and Business Wire. That's why many companies, especially Net-related and biotech companies that trade more on promise than profits, are able to put out a steady stream of releases to pump up their stocks. ''Investors are increasingly putting as much credence in paid releases posted on the Internet as they do in real journalism,'' says Gerald S. Schwartz, president and CEO of G.S. Schwartz & Co., a New York public-relations firm.
Some companies are considered press-release ''blasters''--they put out a press release almost every day. ''Companies create questionable new 'divisions,' 'mergers,' and 'products' just to stay on investors' radar screens,'' says Robert V. Green, an analyst at financial Web site Briefing.com Inc.
In fact, a pending class action against eConnect, filed by investors, alleges that one press release announced a false strategic alliance with a financial concern. Another allegedly announced the false acquisition of a sports company. An eConnect spokesman explains: ''Shareholder suits are not uncommon when there is a precipitous drop in the stock price.'' The SEC has also sued eConnect and its president, Thomas S. Hughes, on the grounds that the company itself had issued numerous ''false and misleading'' press releases. ''eConnect and Hughes neither admit nor deny guilt,'' says the eConnect spokesman.
Some companies argue that their releases are misunderstood. On Monday, Mar. 6, millions of investors were convinced that a small Seattle biotech company, NeoRx Corp. (NERX), had found the cure for cancer. So they pounced on the stock, driving the price up from $21 a share all the way to $70. On that day, NeoRx's volume reached 17 million--up from an average daily volume of 850,000.
CANCER CURE. What caused the frenzy was a company press release headlined ''NeoRx Reports Cure of Lung, Breast, and Colon Cancer in Pre-Clinical Animal Studies Using a Single Dose of Pre-Target Technology.'' Investors zeroed in on two key words: ''cure'' and ''cancer.'' ''The release did not make it clear that validation from human trials could take years,'' says Dayton Misfeldt, an analyst at Roth Capital Partners. NeoRx' CEO, Dr. Paul G. Abrams, as well as his public relations firm, deny crafting a press release that would move the stock. In fact, Abrams went on CNBC that day: ''I explained that it was the first step of a multistep process that would involve testing of humans over several years,'' he said.
A common ploy for companies is to announce that a larger company will be using its services or has been taken on as a client. ''You'd think the two companies are getting married,'' says Green. ''But often, just one employee has signed up for a company's service.''
On Mar. 28, ZixIt Corp. (ZXI), an Internet privacy-and-security company partly owned by H. Wayne Huizenga, announced in a press release: ''The Perot Group Adopts ZixMail for Secure Internet Communications.'' The stock spiked $16 a share on the news, and closed at its 52-week high of $96.50.
As it turned out, only one executive of the Perot Group had registered for the ZixIt service. What's more, investors confused the Perot Group, a small investment concern owned by Ross Perot, with Perot Systems, the giant 7,000-employee systems-integration company also owned by Ross Perot.
The next day, ZixIt issued a clarifying press release: ''Our prior press release should not be interpreted to imply deployment or endorsement of the ZixMail service by the Perot Group, Mr. Ross Perot personally, or Perot Systems Corp.'' Since that release, ZixIt's stock has fallen more than 50%, trading at around $43 a share.
ZixIt's CEO, David P. Cook, says the head of Perot's investment group demanded a retraction of ZixIt's press release. ''It's my understanding that they held a short position in ZixIt stock,'' says Cook. ''It was either run a clarification, or they were going to put out their own press release saying we wouldn't run a clarification.'' A Perot Group spokesman responds: ''We don't comment on our investments.'' Cook maintains that the initial press release was accurate.
Years ago, PR agencies that accepted a client's stock as payment were considered little more than stock promoters. Even the most legitimate public relations agencies now commonly accept client equity payments. ''You have a vested interest and a bigger concern for the client,'' explains Schwartz. All of this is no doubt contributing to another problem: the growing trend of obfuscating earnings in press releases. Notes Charles Hill, director of research at earnings-research firm First Call Corp.: ''Companies are increasingly using press releases to get you to view their numbers more favorably than they really are.''
On Mar. 2, Staples Inc. (SPLS) put out a press release playing up the profitability of its brick-and-mortar division while ignoring Staples.com. Staples Inc. owns 88% of Staples.com, and it has applied for its own tracking stock. Nevertheless, on the same day, the dot-com issued a separate release headlined: ''Staples.com Revenue Grows More than 450% for Fourth Quarter and Year.'' Buried in the press release was a fourth-quarter profit loss of $9.8 million.
Others such as the Walt Disney Co. (DIS) and Ziff-Davis (ZD) have used similar earnings-release strategies. ''Investors must look beyond press releases and review a company's filings with the SEC, which subscribe to generally accepted accounting principles,'' says the SEC's Ullman.
But as press release language gets murkier and murkier, one thing is crystal clear: Investors who buy on PR sparks are likely to get burned.
By Marcia Vickers in New York
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