Online Columnist Picks a Hot Stock and Rides Along
Even by the sky's-the-limit standards of the Internet age, the financial takeoff of a little-known Cayman Islands-based company called Xcelera.com was nothing short of remarkable.
From Sept. 29 through March 22, the stock soared in value by more than 3,000 percent, and a single online stock columnist provided part of the rocket fuel. It was on Sept. 29 that Xcelera was favorably mentioned in a column by Jon D. Markman, managing editor of Microsoft Network's popular MoneyCentral site.
The stock's surge was good news for Markman as well. In a note at the bottom of his Jan. 5 column, which he used to tout the stock for a third time, Markman disclosed that he owned shares in Xcelera.com Inc. By late March he had managed to turn a $335 investment into $4,120 in just three months, at least on paper. But the value of his investment plummeted as Xcelera stock dropped by 70 percent in recent weeks.
Markman fared better with Superconductor Technologies Inc., another stock he trumpeted on the Web site. In one month the value of his holdings skyrocketed to $13,293 from about $1,200, and while the stock also has fallen sharply, his shares still are worth about twice what he paid for them.
The Internet has not only allowed millions of people easy access to stock trading, it has become the medium through which countless individual traders find and share information--through chat rooms, bulletin-board postings and online news services such as Markman's--in a constant search for a leg up on their investments. The explosion of fast-moving information about stocks on the Internet has contributed to wild swings in the markets, especially the Nasdaq Stock Market, in recent months.
But individual investors are not always aware of the potential conflicts among those who dole out advice, who may be investors in the stocks they are talking up.
Markman says he followed the MoneyCentral rule that journalists are allowed to write about companies in which they own stock--as long as they don't trade in firms that they know will be the subject of an upcoming story, and wait two business days after publication of their stories to resume trading.
"I can see that there would be an appearance problem," Markman said from Microsoft Corp. headquarters at Redmond, Wash. He said, however, that "the emotional value of owning stocks informs our view and helps us be better writers about the market."
Dan Fisher, MoneyCentral's editor-in-chief, defended his deputy, saying: "We're not like market reporters on newspapers. . . . We want our people to own stocks. We want them to know what it's like." But, he added, "the power of the Web to impact stock prices of thinly traded stocks, that's a new world for us."
MoneyCentral is the most popular financial site on the Internet, with 4.3 million visitors in March, ahead of CBS MarketWatch, Motley Fool, Bloomberg, CNNfn, CNBC and TheStreet.com, according to the firm Media Metrix.
The episode underscores the power and the pitfalls of online journalism. "It is totally and completely indefensible for any journalist to trade stocks in companies he writes about," said Christopher Byron, a financial columnist for the New York Observer and MSNBC.com, who was the first to mention Markman's role. He said the practice "undermines and taints the entire practice of journalism" because it "plants the seed of doubt in the public that journalists everywhere may have hidden financial agendas."
Policies vary at other news organizations. At TheStreet.com, for example, full-time staffers may not own any individual stock, other than in their own company. At the Wall Street Journal, no news staffer covering a specific industry can buy or sell stock in any company related even in part to that industry; other stocks must be held for a minimum of six months. At CBS MarketWatch.com, like MoneyCentral, staffers who write about a stock must wait two days before trading the stock and cannot trade stocks of companies they cover. The Washington Post does not allow financial reporters to engage in "excessive" trading, and staffers cannot write about companies or specific industries in which they own stock.
Chris Ullman, a spokesman for the Securities and Exchange Commission, said the agency is devoting more resources to stock fraud on the Web. But he said it is not against the law for someone to publicly promote a stock he owns, even with the express purpose of boosting its price, as long as that person says nothing untruthful about the stock.
Markman, who wrote a book and gives speeches about stocks, is a former Los Angeles Times reporter who says on MoneyCentral that he shared in two Pulitzer Prizes at the newspaper. He said in the interview that his role, as a news editor and picture editor, was minor.
Xcelera, a company controlled by Connecticut financier Alexander Vik, began surging in the spring of 1999 after it bought a struggling Swedish firm that provides technological help to Internet sites to distribute their wares.
In his Sept. 29 column, Markman called Xcelera, then known as Scandinavia Co., "a high-risk long shot" but a "stock to watch," noting its 2,060 percent rise over the previous 12 months. He said Xcelera might be included on his list of stocks that could rise 10,000 percent over the next 10 years.
Markman's words appeared to greatly boost the stock. That day 1,238,400 shares of Xcelera were traded, compared with 124,800 the day before. On Sept. 29 and Sept. 30, the price of Xcelera stock jumped by 50 percent, to a split-adjusted $3.43 3/4 a share.
Less than a month later, on Oct. 27, he wrote that Xcelera is "now up 170 percent since we mentioned it here Sept. 29. . . . Look for the potential for further gains."
The stock kept soaring and Markman bought 40 shares on Dec. 20, for a split-adjusted price of $8.37 1/2 a share. On Jan. 5 Markman noted that Xcelera had surged 550 percent since he first wrote about it in September, attributing the rise in part to an investment and endorsement by Hewlett-Packard Co. He said that "some industry observers" believe that Xcelera "has a more ambitious and more technologically advanced solution" to the problem of distributing images over the Internet. "With a market cap of $1.7 billion, I think this one has a clear shot at $25 billion in market value, and potentially a lot more," he wrote.
That was the column in which Markman disclosed he owned Xcelera--along with such stocks as Sun Microsystems Inc., America Online Inc., Yahoo Inc., Cisco Systems Inc., Nokia Corp., Oracle Corp., Qualcomm Inc. and Microsoft, all of which were mentioned in the column or on Markman's hot-stocks list.
By March 22 the Xcelera stock that Markman bought for $8.37 1/2 a share had reached $111.75, and he bought another 40 shares. But that turned out to be the high point and last month Markman sold half his holdings for a slight profit. Xcelera closed Friday at $33.25 a share, still about four times the price of Markman's original purchase.
In the case of Superconductor Technologies, Markman bought 150 shares in late January, "when I barely even knew what the company made," he said. Stock in the Santa Barbara, Calif., manufacturer was then selling at about $8 a share, though Markman did not provide the exact date of purchase.
Markman told his readers that he had no intention of assigning or writing a story about Superconductor at the time, but that after talking to its executives, he got "very excited" and decided to include it in his list of potential 10,000 percent gainers.
On Feb. 16, when Markman wrote what he described as a "pitch" for Superconductor, and disclosed that he owned the stock, the price nearly doubled, to $30.87 1/2 a share from $17.75. The volume of trading, which had been 331,000 shares the day before, rose to 9,234,700. Superconductor also issued a news release that day about a major new order from an unnamed cellular service provider.
By Feb. 29 the stock had risen 575 percent, to $88.62 1/2 a share. But Superconductor also got battered by the general market decline and closed Friday at $16 a share. Markman said that under MoneyCentral rules he will not sell the stock until he has held it for six months. Fisher said Markman technically violated that rule by selling part of his Xcelera stock after five months.
In a March 1 column, Markman acknowledged that some readers had accused him of calling attention to Superconductor so that he could sell when the price jumped--a practice known as "pumping and dumping."
"In retrospect, I realize now I should have sold the stock before adding it to my list to avoid even any suspicion of impropriety," Markman wrote.
Asked Friday whether writing about stocks he owns makes him uncomfortable, Markman said the disclosure at the bottom of his column means "hey, red flag--you should consider what he says and he may be biased in favor of his position. What I'm afraid it means [to others] is the reporter is endorsing the stock and you should go out and buy it if you think he's smart. That's where we have a potential problem." |
