Charles Tamburello->Sorting fact from fiction
When a penny stock rises, look out for signs it is being pumped and then dumped by insiders
Sunday, October 12, 2003
BY JEFF MAY
Star-Ledger Staff
When it comes to stock recommendations, Charles Tamburello is nothing if not consistent.
"We expect great things from this stock!" read dozens of the "investment opinions" put out by his Florida firm, Capital Research Group. Other favorite phrases: "Watch this company; we think it is due to make a move in the near-term" or "It just announced great news!"
The enthusiasm of Tamburello, a 30-year-old former broker, is perhaps understandable: He is paid by the companies to promote their stocks, a fact he points out in the fine print of every release.
But there is a disclosure he doesn't make in the releases: He is the subject of a recent civil fraud action by the Securities and Exchange Commission for touting a dental-imaging company, Dicom, in wave after wave of upbeat recommendations -- even as the company missed earnings targets and was forced to restate revenue figures. Tamburello made more than $1 million selling Dicom stock after the run-up that followed his recommendations, the SEC says.
The case illustrates the volatile world of penny stocks -- small companies whose shares trade for less than $5. Last summer, a flurry of Capital Research Group releases coincided with sharp rallies in the shares of Classica Group and Rascal's International, two New Jersey companies that paid Tamburello to give their businesses more exposure.
Tamburello's attorney, Jeffrey Tew of Miami, said his client plans to vigorously defend himself against the SEC charges.
"Chuck is a bright young fellow who works hard for his clients," Tew said.
The dot-com bust and decline of day trading blunted some stock promotion scams. But as the economy rebounds, so does interest in penny stocks -- and any information that can be gleaned about them, reliable or not, experts say.
Penny stocks have very low trading volume, so a concerted effort to drum up buying interest can have a dramatic impact on its price, especially in the short run.
Many stock promoters take on the trappings of a research outfit or hire "analysts" to write reports, the SEC warns. Often, their goal is to drive up a stock, then sell whatever shares a company may have given them as compensation -- what's known in the trade as a "pump and dump."
"There are a lot of folks out there (who) are just unregulated," said Lou Thompson, president of the National Investors Relations Institute, a Virginia-based group that represents more than 5,000 investor-relations officers and consultants. "They don't follow any standards but their own. It's truly an 'investor beware' situation."
Companies such as Tamburello's operate under a regulatory loophole. Because they don't employ brokers or other licensed professionals registered by the National Association of Securities Dealers, they aren't subject to the latest, tougher conflict-of-interest rules that govern research analysts, Thompson said.
But because mainstream equity analysts rarely cover small-cap companies, investors have few other outlets for information. Often, the only guard against unscrupulous operators is the threat of prosecution.
"It can be difficult to police," Thompson said.
Tamburello, who lives in Weston, Fla., began work in the financial industry right out of high school, his attorney said. He qualified for a stockbroker's license in New York and, according to NASD records, worked for two smaller investment firms, PMG Securities and Joseph Charles.
By the mid-1990s, he had given up his broker license and started working for free-lance investor relations firms in Florida, home to many stock promoters. By 1999, he had his own company.
On its affiliated Web site, TheSUBWAY.com, Capital Research Group describes itself as a company for "experienced, risk tolerant investors." The firm's name is similar to Capital Research and Management, the large California-based investment adviser, but the two companies aren't related.
Tamburello has represented scores of companies. He often issues multiple copies of the same release via different news wires, sometimes under the Capital Research Group name and sometimes under TheSUBWAY.com. By adding widely traded stocks such as Lucent and Rite Aid to its "stock focus" lists, it guarantees its releases will be picked up by services that cull company-specific information for investors.
Tamburello has apparently done well with the business: During March, he paid $1.2 million for a 5,000-square-foot home in Windmill Lakes Estates, a gated community a neighbor described as one of the most affluent developments in Weston, a wealthy suburb of Fort Lauderdale.
The SEC cited Tamburello in the Aug. 13 Dicom case not because he took compensation for his reports, which is legal as long as it is disclosed, but because he didn't give a full accounting of his compensation. Omitted from his disclaimers were cash payments of $5,000 a month and an accurate count of his stock holdings.
Along with another stock promoter and Dicom's CEO, he is also charged with providing "false and misleading" projections about the company's sales and prospects.
Contacted about the case last month, Tamburello said, "This is why we don't talk to reporters" and hung up.
In its complaint, the SEC said Tamburello first signed a contract with Dicom Nov. 23, 1999, when the stock was trading for less than $6. He began selling the stock received Dec. 28, and continued unloading it through April as the price increased.
The SEC said Tamburello used financial projections provided by the other promoter in the case, Jeffrey Welsh, to prepare investment opinions that bore little reality to Dicom's financial situation. Although the complaint doesn't mention it, Tamburello's recommendations said he also relied on paid reports by National Capital Securities, an Irvine, Calif.-based firm the NASD last year charged with issuing fraudulent research.
Capital Research Group had a knack for issuing sunny news about Dicom just as the company was filing dire news with the SEC.
On Jan. 11, 2000, for example, TheSUBWAY.com issued a release that mentioned the company's stepped-up public relations efforts. "Many new investors should be jumping into the stock in a relatively short period of time, thus forcing the coverage of any short positions (if any) and dramatically increasing the demand for the stock," the recommendation read.
On the same day, Dicom issued a press release that said it was restating revenue for the quarter ending Sept. 30, 1999, a $600,000 swing that turned a net profit into a loss.
Tamburello issued another release Jan. 25, 2000, that projected $7 million in earnings for the year. The company put out its own statement that said the Sept. 30 quarter loss would be $250,000 deeper than it had just fixed in its restatement.
During February 2000, Tamburello issued 11 releases about Dicom -- and sometimes two during the same day, according to SEC. By the end of the month, he had projected a share price at $40.
When the information leached out to message boards on financial Web sites, including Raging Bull, his prediction almost came true -- the stock hit a high of $36 March 1, according to the complaint. By April 10, Tamburello had cashed out his shares and made a profit of $1,065,000, the SEC claims.
Dicom did less well: By 2001, it had ceased operations.
Capital Research Group continues to line up customers, despite the SEC action.
Ed Rodriguez, the chairman and CEO of Rascal's International, which operates a chain of comedy clubs, said Capital Research Group stopped working for him during August. Rodriguez declined comment on how or why he hired him.
Gregory Love, president of Elite Flight Solutions, was similarly close-mouthed. The Sarasota, Fla.-based company, which operates a charter jet service, gave Tamburello 1 million shares, of which he sold 800,000, according to information on TheSUBWAY.com.
"I don't have any comment on that," Love said of Tamburello's hiring.
Last week, the CEO of Classica Group, Scott Halperin, was charged with federal securities fraud for trying to manipulate the stock of his company in August and September. Tamburello, who had Classica on his "stock focus" list during that period, disclosed Aug. 25 that his firm had received 75,000 shares of Classica as of that date and sold them all.
Thompson said one way to eliminate conflicts with outside investor-relations firms is to pay them only in cash, so there is no incentive to manipulate the price of the company's stock. His organization is trying to draft standards on the topic with the Association for Investment Management and Research.
But the burden ultimately goes back to the companies themselves, Thompson said.
"The CEOs of these companies don't get it," he said. "They hire these people."
Jeff May can be reached at jmay@starledger.com or (973) 392-4282. |
