Dutton Dismisses SEC Probe of EasyLink, Dow Jones Article as 'Presidential Politics'
Aug 4, 2004 (financialwire.net via COMTEX) -- (FinancialWire) Robert M. Davis, the JM Dutton & Associates research analyst covering EasyLink (EASY), has attributed the U.S. Securities and Exchange Commission investigation of the company's "accounting problems," and the subsequent article by Dow Jones (DJ) to "a bit of pre-convention Presidential politics, with EasyLink caught in the middle."
Saying the story is "gradually" fading away, the analyst cited a Motley Fool article on July 6 that suggested that the SEC is anxious to show that it is willing to investigate a small company along with Verizon (VZ) and Nortel Networks (NT) because the "SEC doesn't want to miss another potential major scandal or get upstaged by a New York attorney general."
The current Dutton research note inexplicably does not describe any fundamental analysis of the gyrations, noting "the stock's momentum-based indicators have begun hinting at the development of a base and the beginning of a recovery. It appears that this buying opportunity may be at hand."
The research note also does not describe the analyst's thinking in 2002, when he was similarly ebullient but failed to call attention to any red flags in the company's accounting of barter that the media has noted the SEC now finds questionable (see FinancialWire, July 16, 2004).
It was during that period, too, that SEC Chair William Donaldson was on the company's board, as well as its audit and compensation committees.
EasyLink CEO Thomas Murawski will host a webcast and conference call tomorrow at 10:30 a.m.
There was also no further response to McGraw-Hill's (MHP) Business Week assertion in December, 2002, that in its initial report, Dutton had not made complete compensation disclosures as required by SEC Regulation 17(b).
The report "does not explicitly say that EasyLink paid Dutton," said BusinessWeek, but reporter Gary Weiss said when questioned, "the firm's president, John M. Dutton, confirmed the payment and said there was no understanding that Dutton would provide favorable reports."
Perhaps tellingly, Tuesday's email blast from Dutton that summarized the analyst's research note, located at jmdutton.com , stated that the Dutton research "currently costs US $33,000 prepaid for one year." It mentions further that "specific company compensation" is detailed on each report and note.
The report's disclosure did in fact differ with the email newsletter disclosure, saying EasyLink had paid Dutton & Associates $48,000, not too different from the Business Week allegations of a year and a half ago.
In a letter to the panel developing "Best Practices Guidelines" for the CFA Institute, on May 19, 2004, however, Dutton had stated, "We believe it is germane to an investor to know the total and nature of all compensation received by an analyst/firm from the company on which it is issuing research."
Independent analysts who reviewed the current report said they found it highly unusual for an analyst to focus on stock price rather than company fundamentals, and especially to not discuss or reference fundamentals at all, not to mention its dismissal of an SEC investigation and media article as "Presidential politics."
The analyst's biography does not indicate that Davis has been or is currently credentialed in any phase of the Chartered Financial Analyst program; only that he has "applied for membership" in AIMR, now the CFA Institute.
Donaldson has since revealed that in April, 2003, he sold his holdings in EasyLink, whose chair, Gerald Gorman, had worked at Donaldson, Lufkin & Jenrette, the firm that Donaldson had co-founded, as well as holdings in several other companies, including Halliburton (HAL) and Freddie Mac (FRE), altogether worth between $11 million and $35 million.
On September 2, 2002, when Dutton's research was released, the company traded at $2.60. A steady decline followed so that by the time of the Business Week article December 31, 2002, the stock was trading at $0.61, a drop of 426%, and in danger of losing its NASDAQ (NDAQ) listing. The company did not trade above $1 again until July, 2003. It's recent price was $1.34.
EasyLink, previously known as Mail.com Inc., went public in 1999, and its shares rose to a high of $271, after adjustments for splits.
"UNDERVALUED"?, asked Business Week. It said the Dutton report gave EasyLink a "speculative buy rating," with a 12-month price target of $3.25, and in a departure, referenced "technical indicators" and trading patterns rather than fundamentals for the "target" and "rating." It noted Donaldson's presence on the "strong board of directors" and said the company "appears to be undervalued."
The subsequent Dow Jones' (DJ) Wall Street Journal stated the SEC has "confirmed that it tapped an outside lawyer, Daniel Nathan, an attorney with the Commodity Futures Trading Commission, to monitor the agency's staff investigation of EasyLink. The technology company said last week that the SEC is investigating its accounting for advertising barter deals in 2000, when Mr. Donaldson was a board member." It also occurred in late 2000, when Dutton was providing "independent analyst coverage." The deals were valued at $3 million.
WSJ said it had information that the SEC is "moving toward building a case against the company and perhaps a corporate official." It said "Donaldson, 73, has recused himself from the case because he was a member of the company's board from 1998 to 2002, sitting on its audit and compensation committees."
The U.S. Securities and Exchange Commission Regulation 17(b) states:
"It shall be unlawful for any person, by the use of any means or instruments of transportation or communication in interstate commerce or by the use of the mails, to publish, give publicity to, or circulate any notice, circular, advertisement, newspaper, article, letter, investment service, or communication which, though not purporting to offer a security for sale, describes such security for a consideration received or to be received, directly or indirectly, from an issuer, underwriter, or dealer, without fully disclosing the receipt, whether past or prospective, of such consideration and the amount thereof."
The SEC has told FinancialWire that this regulation means full and complete compensation for research and any other services provided, including amounts and sources, must be disclosed in "every press release" as well as other published documents. The SEC states that third party compensations must include the relationship of the payer to the issuer.
In an email to FinancialWire, John J. Nester, a spokesperson for the U.S. Securities and Exchange Commission, confirmed that regulators interpret 17(b) to mean that specific compensation information must be contained in press releases, and that a link to a disclosure somewhere else, for example, is a violation of the regulation. He further stated that the compensation disclosure required by the SEC includes "amounts and sources in any press release mentioning the company under research coverage."
The SEC had previously told FinancialWire that it intends to enforce these provisions so that investors may have a fully transparent understanding of any potential agenda or lack thereof.
In a January 2000 research report, the SEC said outside analyst Paul Bornstein, who it has charged with 17(b) violations and fraud, "failed to disclose that at least part of Bornstein's optimism about CyberCare (CYBR), then on the NASDAQ (NDAQ), resulted from his simultaneous employment by CyberCare's public relation's firm.
A "Standards for Independent Research Providers" at firstresearchconsortium.com , which may be adopted without fee by any qualifying independent research provider, lists a number of firms that adhere to the SEC regulations, as well as additional ethical and transparent practices. Dutton has not adopted the "Standards."
While independent research by standards-driven providers are growing in legitimacy, according to the Dow Jones (DJ) in a recent article, the article quoted Lou Thompson, president of the National Investor Relations Institute, which had issued new Guidelines in 2002 endorsing legitimate "paid-for" research, as warning of "various mutations of paid-for research."
The compensation "oversight" noted by Business Week for Dutton's EasyLink research was not the first for a company enrolled for research by Dutton, however.
The chat room postings connect Dutton to Investrend Research (http://www.investrendresearch.com ) , quoting an article in Wall Street Research Online Magazine by Ben Mattlin, headlined "An Independent and Pure Research Shop."
The article said that Dutton "founded Investrend . from which he parted to start the new company, taking many of the analysts with him." Mattlin quoted Dutton as saying "The more sunlight that shines on every step of the process, the better for everybody." Mattlin further stated, "Dutton's back-to-basics philosophy sounds refreshingly honorable and extraordinarily well timed." Mattlin has since said he had checked his notes and "evidently misunderstood Mr. Dutton when he told me about the 'model' he had 'successfully built' while president and director of research at Investrend Research . and so forth."
Mattlin further stated, "I shall make a note of the correction on any reprints of the article I distribute, including the one on my own personal web site . I apologize for the oversight."
When Dutton started his company in September, 2001, he did indeed list several Investrend analysts, many of whom have since returned to Investrend, and several companies under coverage by Investrend were subsequently "covered" by Dutton. Some later stated they thought they were "still" being covered by Investrend despite the name difference, and several companies in contact with Dutton believed Dutton was still with Investrend a year later.
In short, the "transition" was not precisely bathed in "sunlight." Dutton's new website stated that Dutton & Associates "was founded by John M. Dutton on the model he successfully built while president and director of Investrend Research."
The problem, according to Investrend Communications, Inc., is that Dutton, who was terminated for cause in July, 2001, wasn't even associated with Investrend Research when it was founded several years earlier, in 1996, as the first, largest and pioneering independent research provider, and Dutton had no input into the model or policies of Investrend. Dutton was president of the research division for only about two years while the actual founder was involved in an unrelated venture.
Nevertheless, his company's new coverage descriptions were virtually word-for-word with those he had inherited at Investrend Research.
Armed with the misinformation of the Mattlin and subsequent promotional material listing Dutton as variously the "founder" or "model builder" at Investrend, chat rooms headlined the Easylink investigation as "INVESTREND/DONALDSONGATE."
Investrend Research said it was approached by a representative of EasyLink in March, 2002, about possible coverage, but subsequently did not provide the coverage. "We most certainly had no relationship to the coverage or anything else associated with Mr. Dutton after July, 2001," stated a spokesperson.
"Investrend Research was the pioneer, developing the standards and models now followed by a small industry of legitimate independent research providers; it remains the largest and most effective, and we stand on our own," he said.
Companies in the FinancialWire series about questionable research practices and disclosures have included Horizon Medical (HMP), Nymox (NYMX), Genesis Technology Group (GTEC), Martek Biosciences (MATK), Ecolab (ECL), Clorox (CLX), Dial Corp. (DL), AdZone (ADZR), American Water Star (OTCBB: AMWS), Markland Technologies (MRKL), Transnational Financial Network (TFN) and Telkonet (OTCBB: TLKO), Cytomedix (CYME), LocatePlus (LPLHA), Rockport Healthcare (RPHL), Universal Express Co. (USXP), Lifestream Technologies (LFTC), Home Solutions of America, Inc. (HOM), AirRover Wi-Fi Corporation (AVWF), CareDecision Corp. (CDED), Life Energy and Technology Holdings, Inc. (LETH), and Flight Safety (OTCBB: FSFY);
Also, Playtex Products (PYX), Ericware Technologies (ECWR), NuTech Digital, Inc. (NTDL), Terra Nostra Technology Ltd. (TNRL), and NanoSignal Corp. (NNOS)., DNAPrintGenomics (DNAP), Syndication Net.com (SYCI), Quintek Technologies (QTEK), GeneLink (OTCBB: GLNK), Quality of Life Health Corp. (QLHC), Environmental Remediation Holding Corp. (ERHC), Cornerstone Entertainment (OTC: CNRH), Medifast, Inc. (MED), Workstream, Inc. (WSTM), SIGA Technologies (SIGA), Sub Surface Waste Management of Delaware (SSWM), Xfone, Inc. (XFNE), Offshore Systems International (OFSYF)(OSI), American Ammunition, Inc. (AAMI), Electric City Corporation (ELC), Digital Recorders Inc (TBUS), AeroCentury (ACY), CTI Industries Corp. (CTIB), Vermont Pure Holdings Inc (VPS), CytRx Corporation (CYTR), Misonix (MSON), Destiny Media Technologies (DSNY), BioSante Pharmaceuticals Inc (BPA), Sonoran Energy, Inc. (SNRN), a21, Inc. (ATWO); and
Also, OrderPro Logistics (OPLO), Military Resale Group, Inc. (MYRG), Timber Resources International, Inc. (TMBN), OptimumCare Corporation (OPMC), Command Security (CMMD), Molecular Imaging Corporation (MLRI), TechnoConcepts Inc. (OTCBB: TCPT), Sequiam Corporation (SQUM), Provectus Pharmaceuticals, Inc. (PVCT), CinTel Corp. (CNCN), eFoodSafety.com (EFSF), Intelligent Business Systems Group International, Inc (IGII), Chilmark Entertainment (CMKK), Tech Laboratories, Inc. (TCHL), BodyScan Corp. (BDYS), Wireless Frontier Internet, Inc. (WFRI), Ableauctions.com, Inc. (AAC), Human BioSystems (HBSC), World Golf League, Inc. (WGFL), Gaming & Entertainment Group, Inc. (GMEI), UFP Technologies (UFPT), Systems Evolution Inc. (SEVI), Resin Systems, Inc (RSSYF), Touchstone Applied Sciences (TASA), Daxor Corporation (DXR), JMAR Technologies (JMAR), TravelZoo (TZOO), I-Trax (DMX), Axonyx Inc. (AXYX), ImageWare Systems (IW), DXP Enterprises (NASDAQ DXPE), and Epixtar Corp. (EPXR).
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