SEC investigates Marco Island financial 'wizard'
November 13, 2000
SEC investigates Marco Island financial 'wizard'
By ALAN SCHER ZAGIER, Staff Writer
On the Internet, he's known as Merlin, a rags-to-riches Scotsman who shares his financial acumen with day traders seeking the next pot of stock-market gold.
But in Washington and Chicago, the World Wide Web's Arthurian magician - a seasonal Marco Island millionaire named Chris Rea - has caught the attention of federal regulators trying to determine whether Merlin is promising more than he can deliver.
For $495.95 a month, subscribers to trading-places.net are given tips on "how to minimize risk and maximize potential gain" and offered "first-class, industry-model trading alerts," the company touts on its Web site. Skeptics can click onto nine pages of testimonials from successful investors, including one who boasts of earning $50,000 in a day of online trades.
Not everyone connected with the company sees gold at the end of the rainbow, though. A pair of former employees have vocally, and publicly, derided Rea's Trading Places Inc. as a house of cards that skirts antiquated securities laws in the murky world of computer-based investment advisers.
Those complaints caught the ear of the federal Securities and Exchange Commission, which last year began a crackdown on investment chat rooms. While the agency does not comment on pending investigations, or even confirm their existence, a Sept. 18 letter from the SEC's Chicago enforcement office to former Trading Places employee Olivier Asser notes that the agency "appreciates receiving information from members of the public regarding potential violations of the federal securities laws and is giving the information you have provided serious consideration."
Rea, whose company is based in suburban Chicago, bought a home last year with his wife in Marco's exclusive Hideaway Beach, a gated community with the island's only direct residential access to the Gulf of Mexico. In a lengthy interview, Rea acknowledged being part of an SEC "inquiry" but said the probe of Trading Places fizzled out more than a year ago.
"If there was anything to it, we would have heard by now," said Rea, noting high-profile SEC lawsuits filed against other day-trading gurus such as "Tokyo Joe," a one-time burrito maker accused of practicing the "pump and dump," in which advisers first buy stocks, then artificially inflate their price by using enthusiastic endorsements to "pump" their clients. Then it's time to "dump" the prized stocks by selling at a huge profit, with other investors left facing losses as the stock price subsequently plummets.
On Oct. 15, Rea and Trading Places were the subject of a lengthy article in The New York Times, which cited court filings in Texas showing that in 1998 Rea and his wife, Julie, purchased thousands of shares of Zapata Corp., a company later touted on Rea's Web site.
Rea disputes that chronology. In a disclaimer posted on his Internet site, he tells subscribers that "neither Julie or myself or (Trading Places) for that matter has traded one single stock since our inception." He traces that date to late 1998, after the Zapata purchase.
"We made a few million dollars last year," Rea said. "Why jeopardize that by buying and selling a bunch of lousy stocks?"
Asser charges his former boss with making secret side deals with brokers to pay Trading Places for generating trades. While such deals are not inherently illegal, the SEC requires full disclosure to customers. And the National Association of Securities Dealers disallows so-called "payments for order flow" to unregistered agents.
The 47-year-old Rea, a sales and marketing entrepreneur who discovered day trading when his wife caught the bug, isn't registered with federal or state securities regulators. Nor is he required to be.
As evidence of Trading Places' deals with brokerage firms, Asser offered copies of two e-mail messages from Rea to a pair of futures companies, Zap Futures and Lind Waldock.
"It is agreed that Trading Places will receive $5.00 per round trip executed by each trader who has been seeded or introduced to Lind Waldock through our IB (introductory broker) program," reads the May 16 message. "We expect those payments to continue as long as the trader is a Lind Waldock client."
Said Asser: "Both the broker and the chat site are far more interested in commissions than any potential market success of their client/member."
The adverse publicity and lingering questions about the SEC scrutiny has slowed down the once-booming business, Rea acknowledged. But as long as experienced and neophyte investors alike keep looking for an edge, Trading Places will be there to show them the way, he vowed.
"We offer momentum, real-time stock market information. We allow our subscribers to access all the stocks that are moving minute by minute, both long-term and short. We are an information service," Rea said. "Our business is purely one of informing. End of story."
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