SEC Cautions Investors About Analyst Recommendations
FOR IMMEDIATE RELEASE
2001-66
Investor alert provides tips for assessing analyst recommendations and decodes commonly used disclosures
Washington, D.C., June 28, 2001 – The Securities and Exchange Commission has issued an investor alert urging investors not to rely solely on analyst recommendations when deciding to buy, hold, or sell stock. Instead, investors should consult multiple sources of information while considering their own investment goals and tolerance for risk.
Explaining the relationships between securities analysts and the investment banking and brokerage firms that employ them, the alert educates investors about potential conflicts of interest analysts may face. In particular, the alert notes, some analysts work for firms that underwrite — or even own — the securities of the companies the analysts cover. And in other cases, analysts themselves might own stocks in the companies they cover — either directly or indirectly through employee stock-purchase pools in which they and their colleagues participate.
Acting Chairman Laura S. Unger said, "Financial analysts have been the focus of intense public scrutiny in recent months, and I am hopeful the industry will eliminate the conflicts of interest that threaten the fairness and objectivity of analyst recommendations. Our first priority, however, is making sure individual investors are aware of the practices that have called analyst credibility into question. This investor alert should be required reading for anyone considering an investment decision based on an analyst recommendation."
While analyst research reports can offer valuable insights about companies and industry trends, the investor alert urges investors to also study a company's financial filings and read objective sources of information before making investment decisions. The alert also provides tips to help investors find out whether an analyst or the analyst's firm has a financial interest in a company's securities.
The investor alert is available on the SEC website at www.sec.gov/investor/pubs/analysts.htm. Copies are also available by calling toll-free 1-800-732-0330.
sec.gov
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GenesisIntermedia Gave Commentator $3 Mln in Shares (Update6)
By David Evans
Van Nuys, California, May 23 (Bloomberg) -- GenesisIntermedia Inc. gave shares now worth more than $3 million to a financial commentator who helped send the stock soaring after he recommended it on CNN, CNBC and Bloomberg Television.
Genesis, an operator of Internet kiosks in shopping malls, disclosed the payment of 216,000 shares more than a year after Genesis purchased and closed a Web site developed by the commentator, Courtney Smith.
The disclosure of the payment in an annual report with the Securities and Exchange Commission makes no mention of Smith, a TV stock picker who became one of Genesis' largest outside stockholders when he received the shares. The stake is now worth about $3.6 million.
Genesis routed the shares to Smith through a tiny New York- based vitamin exporting company owned by Angela Chen, a friend of Smith, who played no other role in the transaction, according to Smith and Chen.
The so-called 10-K filing with the SEC last month suggests Genesis may have failed to provide shareholders with adequate information on the potential conflicts involving the participants. Genesis didn't respond to requests to answer written questions e- mailed to the company earlier this week.
``If the company hid a payment to an analyst by using a nominee, it could violate'' federal law, said John Coffee, the Aldolf A. Berle law professor at Columbia University Law School. He cited the Foreign Corrupt Practices Act, which requires U.S. companies to maintain honest books and records. ``This looks like deliberately doctoring the books and records of the company,'' he added. ``It shows the need for more disclosure.''
Recommended 18 Times
Genesis fell 45 cents, to $16.70, on trading of 861,500 shares, more than three times it daily average for the past three months. The stock had tripled this year.
Smith, the 49-year-old editor of Wall Street Winners newsletter, said in an interview that he still owns the Genesis shares.
No currently available public records link Smith to the now- shuttered site, DoWebsites.com. Smith said the stock was payment for the Web site he sold to Genesis on March 29, 2000.
Genesis closed the site and wrote off its purchase price by year-end 2000, according to its SEC filing. Smith recommended Genesis shares at least 18 times on financial TV networks beginning in December 1999 and continuing as recently as March of this year.
Smith also publishes two investing newsletters, Wall Street Winners and Commodity Traders Consumer Report. He's president of Courtney Smith & Co., a New York-based money management firm and global strategist for the Orbitex Group of Funds.
Not Disclosed
Smith said that the stock he received might have been viewed as a reward from Genesis for his efforts to promote the stock on television. ``It's quite possible that's what was going through their minds,'' he said. ''If (Genesis) was trying to do that, that's OK because everyone made money on this thing.''
Genesis rose to a record $17.85 yesterday before closing at $17.15. Based on the 21.9 million shares outstanding, Genesis has a market value of about $375 million.
Smith's stake was less than the 5 percent ownership that would require a disclosure to the SEC. Genesis Chief Executive Ramy El-Batrawi, other insiders and Adnan Khashoggi, the international arms dealer and financier, own all but 1.85 million, or 9 percent of the company's shares.
Genesis never disclosed the payment to Smith, which was made through a third party, United Pacific Alliance, a New York-based vitamin exporter owned by Smith's friend Chen.
`Probably Overpriced'
In an interview, Chen said she received a small fee for making her company the conduit for the transaction. She said she met Genesis CEO El-Batrawi once, in Las Vegas, accompanied by Smith.
Smith hasn't pitched the shares on TV for more than two months, and said in an interview he wouldn't advise buying the stock today.
''It's probably overpriced right now,'' said Smith. ''It's definitely not the time to buy this stock.'' During his television appearances, he said he was attracted by the company's Centerlinq division, which operates kiosks in 32 shopping malls.
Smith expressed surprise when a reporter told him that less than 1 percent of Genesis' revenue comes from the kiosk division, according to the company's most recent filing with the SEC.
``That disturbs me,'' he said.
`Hot Speculative Pick'
Most of Genesis' revenue comes from telemarketing and infomercials for products, including Ab Twister exercise machines and tapes with advice on love and personal finance. The company had a loss of $33.5 million in 2000, on sales of $42.3 million. Genesis had a further $7.9 million loss in the first quarter of 2001, on sales of $12.5 million. The company had a negative net worth of $14.9 million as of March 31.
When Smith first recommended the shares on television on Dec. 21, 1999, he called the company ``a very hot speculative pick'' on Bloomberg TV. The shares rose 50 percent, to $2.25 from $1.50, the next day, trading 29 times their average volume over the prior three months.
``If I move the price of a stock, it's a bogus rally,'' he said in an interview. Six weeks later, on Feb. 8, 2000, Smith predicted on Bloomberg TV that Genesis shares would rise between threefold and fivefold. The next day, they gained 77 percent, to $3.92 from $2.21, on 24 times their average volume.
On Feb. 25, two weeks later, Smith named Genesis as his ``Double Your Money Pick'' on CNBC. The stock gained 70 percent, to $9.33 from $5.48 on 21 times its average volume.
``When I saw that spike, that was mortifying to me,'' he said. ``It meant people bought at a high price.''
The next month, Smith received his 216,000 shares from Genesis.
After that, Smith recommended Genesis shares a total of 10 more times between April 2000 and this past March on Bloomberg, CNBC and CNN.
Rafi Khan
The shares soared yet again this month after a buy recommendation was distributed by Rafi Khan, an ex-stockbroker banned from the securities industry for stock manipulation and now on probation for income tax evasion.
Smith said DoWebsites.com was designed to provide advice to others about creating Web sites. He said it had no advertising or other sources of revenue.
``It didn't have much of anything when we sold it,'' he said, adding no other buyers were sought.
Genesis first disclosed purchase of the Web site from United Pacific Alliance and closure of the site in its 2000 annual report.
The company said it ``believes that the market for services offered by DoWebsites.com has decreased substantially due to the recent closure of many Internet related companies.'' Although Genesis lists the contract to buy the Web site from United Pacific Alliance as an exhibit in its 10-K report, the contract is missing from the report in the SEC database.
Absent from Newsletter
Smith never recommended Genesis in Wall Street Winners, which ranked second among investment advisory letters in performance for 2000 with a return of 150 percent, according to Hulbert's Financial Digest.
Genesis has failed three of Wall Street Winners' own stock selection rules since Smith began touting its shares. The criteria include low, but positive, price-earnings and price-cash flow ratios. Genesis had negative earnings and negative cash flow. Low capital expenditures are also mandated, while Genesis has spent tens of millions of dollars to install its shopping mall kiosks.
``Centerlinq was a black hole for cash,''' said Smith. ``They're burning through too much cash.'' |
