RONALD DURANDO ALSO RENTED AN ANALYST
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Rent-an-analyst
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"The eight companies, meanwhile, were not charged. One company, PACKETPORT, a Norwalk, Connecticut-based company, still has its press release announcing the Stockreporter.de analyst report on its investor relations web page under press releases. There is no mention of compensation paid for the report."
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Rent-an-analyst
irmag.com
Rent-an-analyst
Ian Sax uncovers the sometimes seamy practice of paid-for research June 2002
Between May 14, 1999 and December 4, 2000, Christina Skousen, a 49-year old resident of Novato, California, wrote research reports on eight micro-cap companies. Appearing at a time when equity valuations were soaring, the reports were on the bullish side. Seven of them contained revenue projections that exceeded the companies' most recently reported revenue figures by more than 200,000 percent.
On February 22, the Securities and Exchange Commission filed a federal court action against Skousen as an individual and doing business as CSK Securities Research. The complaint described Skousen as a 'self-styled analyst' with a high school education, one year of college and 18 months of secretarial training. Her credentials, however, were not the issue. The SEC alleged that Skousen had been writing fraudulent research reports touting the eight micro-cap companies.
Among the most damaging charges outlined, Skousen's projections lacked a reasonable basis given the companies' poor financial track records; and her projected stock prices (which exceeded the current prices at the time by as much as 18,650 percent) were 'arbitrary.' According to the SEC, Skousen was typically paid cash by the very companies her reports were about.
A penny for your research
As the US Congress, the SEC, and a number of financial self-regulatory bodies and their members furiously debate reform of the financial industry, accounting reform has stolen the headlines in the last few months. But it is the issue of analyst independence that has received some of the most intense scrutiny ever since the dot-com bubble burst, the equity markets nosedived, and investors turned their ire on the Henry Blodgets and Mary Meekers of the world.
Most of the story surrounding the conflicts of interest that analysts face are well known, starting with pressures that develop within large research houses between the interests of their investment banking businesses and their research departments. Another potential conflict: buy-side clients who don't want a stock in their portfolio to get hit by a negative report.
Despite all the attention, analyst reform has hardly touched on a lesser-discussed area: research that is commissioned by companies themselves. For many investment and corporate professionals, the idea that companies pay analysts directly in return for research reports may seem far-fetched. In the world of small and micro-cap stocks, the arrangement is not an anomaly.
For these companies the term underfollowed takes on a whole new meaning. There may be an analyst or two that covers a company following its IPO - generally linked to the compensation flowing from the underwriting business - but after a few quarters, even they drop off unless financial ties between the company and the analyst's employer continue.
'It's a catch-22 situation. Analysts don't want to start covering a company until there's interest, but there's no interest until analysts cover the company,' says Steven Tuen, president of independent research provider IPO Value Monitor and portfolio manager of the Kinetics Internet Emerging Growth funds.
Some companies decide the best option is to create the coverage, thereby drawing interest and, with luck, more coverage that they don't have to commission themselves. 'It's like advertising. You have to put something out there to get something in return,' says Heber Mughan, CFO of Paradigm Medical Industries, a small Salt Lake City, Utah company with $8 mn in annual sales.
There are plenty of firms ready to cater to companies looking for coverage. Many present analyst reports as part of an 'investor relations' or 'corporate consulting' package, and companies compensate them through cash payment, warrants or other methods. Often, the firms provide a research report, a press release that announces the report, e-mails to would-be investors, and in some cases, coverage on affiliated financial web sites that advise investors on what stocks to buy. The problem from a legal standpoint isn't the relationships, it's the disclosure.
The seamier side
As of March 2001, the SEC had brought more than 200 internet-related enforcement actions, nearly half of which had been brought in the preceding 14 months. The actions involved over 750 named individuals and entities. A scroll through the litigation releases posted on the SEC's web site is a sometimes hysterical but more often horrific glimpse of what can go so wrong with the proliferation of online financial sites and related firms. For companies seeking to buy research coverage, it can also serve as a cautionary tale, warning of the potential risks.
In Christina Skousen's case, four of the eight instances of touting cited in the SEC complaint appeared in reports published on a German web site, Stockreporter.de, which failed to mention Skousen as the author. Four others were written under the name CSK Securities Research, and two of these failed to disclose that Skousen was directly compensated by the companies or indirectly by Stockreporter.de's principals. Both Stockreporter.de as well as at least one company issued press releases announcing the positive reports without proper disclosure.
The principals of Stockreporter.de were enjoined by a US District Court from future violations of securities laws in 2000 (the web site was not functioning when last checked). Since the commission filed the action against her, Skousen has consented to have an injunction entered against her by the court. 'Once the judge signs it, any future fraud she commits would violate the court injunction,' says Mike MacPhail, deputy assistant director of the SEC's enforcement program in Denver, where the complaint was filed.
The eight companies, meanwhile, were not charged. One company, PACKETPORT, a Norwalk, Connecticut-based company, still has its press release announcing the Stockreporter.de analyst report on its investor relations web page under press releases. There is no mention of compensation paid for the report.
NanoPierce Technologies of Denver, Colorado was another company subject to Skousen's research coverage. According to the SEC complaint, Skousen projected that NanoPierce would achieve revenues of as much as $123 mn. During the previous fiscal year, the company had reported zero revenues. That report doesn't appear on NanoPierce's web site, but another report does.
On February 21, 2002, Schneider Securities rated NanoPierce a speculative buy. The report makes a very clear disclosure that Schneider Securities acts as a 'corporate consultant' to NanoPierce and that it received a cash fee as well as warrants to purchase shares of the company's common stock for its role.
James Creamer, the Schneider Securities analyst who wrote the NanoPierce report, says the firm typically writes research on companies with which it has relationships. But he insists quality and honesty are not at issue. 'I have the freedom to write what I want. And I have the freedom to reject anything I want. And it's not in our interest to write about companies we believe are destined to fail. So from my standpoint, the relationship really doesn't matter.'
As for NanoPierce, president and CEO Paul Metzinger says the company has received a good response from the Schneider Securities report, based on the number of calls and e-mail requests the company and Schneider Securities have received.
He also points out that while the company compensates Schneider Securities for the coverage, NanoPierce is careful to make sure it's working with a reputable firm.
'We do a substantial amount of due diligence because we want to make sure we're dealing with credible and competent people who won't just put out hype,' says Metzinger. 'We want a professional presentation and people who can articulate their work to investors.'
So what happened with CSK Securities Research? Metzinger says he has never heard of the firm. But he is familiar with Stockreporter.de: 'I told [Stockreporter.de] that they better disclose any compensation they receive from us when they write reports on us or any other company. Their response was that because they were a foreign entity, they didn't have to worry. I told them they would get into trouble, and sure enough they did.'
In fact, the SEC has gone after several firms engaged in touting stocks, including NanoPierce stock. The SEC's MacPhail says the type and quality of assistance varies from country to country, but some foreign regulators do compel witnesses to testify or to produce documents. For instance, in May 2000, in connection with an SEC complaint, the Australian Securities and Investments Commission (Asic) filed nearly a score of criminal charges against two Australian residents for touting a Denver company's stock. The SEC has also worked closely with the British Columbia Securities Commission on cross-border cases.
Instances of foreign companies paying firms directly for research coverage, however, are less common. 'My understanding is that instances of a corporate handing over a check for research about themselves is rare,' says Kate Burns, a spokesperson at the Financial Services Authority in London.
In Germany, where Stockreporter.de was based, the Frankfurt exchange has attracted smaller companies, some listed both there and on the US OTC market, including NanoPierce. Germany's securities laws in this area have so far been pretty lax, but a spokesperson for the Bundesaufsichtsamt für den Wertpapierhandel (BAWe), the federal securities and futures regulator in Germany, says reforms to require analysts to disclose conflicts of interest are expected to take effect in early July. At the same time, BAWe will be designated the 'competent authority', which will allow it to investigate market manipulation and the activities of firms like Stockreporter.de on its own.
Decision to pay
Those companies that do decide to pay for research, disclosing that fact or not, face a tough sell to investors. Professionals, particularly fund managers, are skeptical of companies that compensate firms for research. 'We take a fairly cynical approach, so we don't accept what people say without employing our own research to validate it,' says Peter Larson, senior vice president and head of the small-cap value team at Fleet Investment Advisors. 'I've heard conversations out there hinting that the practice of paying for research exists, but outside of the high promotional stock, I haven't seen the legitimate companies doing it.'
Winston Cabell, investor relations manager at Praxis Pharmaceuticals in Vancouver, British Columbia, admits that for the most part, it's individual investors who are attracted by the research reports his company commissions. 'Press releases and these types of research reports are the tools for micro-cap stocks,' he comments. 'And we've been able to gather a large audience this way, primarily among individual investors.'
Given the current climate, however, investors, professional or not, have become more skeptical, especially when a company isn't transparent. Some companies, for instance, issue press releases to announce positive research without disclosing they commissioned the coverage. It's a gray area, but the SEC's MacPhail warns, 'It's borderline. For a company to suggest they received coverage without disclosing that it was paid for is, in my personal opinion, fraudulent.'
More to the point, the practice may simply backfire. 'There has to be disclosure in it, and if you try to avoid offering the disclosure, I think it will come back to haunt you. It looks like you're trying to pull a fast one,' says Vincent Catalano, president and chief strategist of iViewResearch, a Katonah, New York-based research and consulting company, and a past president and current director of the New York Society of Security Analysts (NYSSA).
Steven Tuen, who looks at the issue both as investor and as an independent analyst (he says IPO Value Monitor cannot cover companies owned by his funds), believes companies are better off avoiding paying for research reports. 'If you're paid by the company that is subject to the reports, the coverage is perceived as tainted and it receives less credibility. It's in the same vein as sell-side research analysts' conflict of interest problem with investment banking ties, but it's even more pronounced. I don't think paying is worth it. You're only as good as your reputation, and if you jeopardize it, there go your future earnings.'
Niri's view
In January 2002, the National Investor Relations Institute announced its board of directors had revised its guidance for the practice of commissioning or paying for research reports. In its guidance, Niri acknowledges that some companies desire to pay for research in the absence of traditional sell-side coverage. The January 2001 edition of the Niri Standards of Practice for Investor Relations warns companies to 'proceed with caution to ensure that those who would write research reports are operating legitimately and not in violation of federal securities laws.'
Alternatives
Vincent Catalano of iViewResearch says anything that helps grow a company's market cap helps the company's competitive position. 'Equity is currency, but small caps are severely disadvantaged because they don't have the broad market support to warrant a higher market cap.' Paying for research, however, is not an option that Catalano believes serves a company's best interests. Instead, he recommends creating what he calls an intelligent IR/PR effort. 'You can use the web, you can have a white paper written about your company, and you can have executives talk to the public.' Catalano says the financial part of the 'valuation equation' is as important as the operational part, and an important part of the corporate communications effort. 'You need senior management to focus on financial management, not just operational management. That may include teaching management to speak the language of investors and analysts. You're trying to present the right face and a consistent face to the world, and that includes the financial world.'
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Stockreporter Announces Investment Opinion on ZiaSun Technologies
Business Wire, April 13, 2000
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Business Editors
NOTE TO EDITORS: The following is an investment opinion issued
by Stockreporter
NEW YORK--(BUSINESS WIRE)--April 13, 2000
Stockreporter issues strong buy recommendation on ZiaSun
Technologies, Inc. (ZSUN) with a $28.50 year 2000 share price target
ZiaSun Technologies, Inc. (OTC BB: ZSUN; Frankfurt: ZIA) today received a strong buy recommendation from Stockreporter, a leading European financial Internet publication located at www.stockreporter.de that specializes in the coverage of micro-cap stocks and undervalued companies. Stockreporter initiated coverage of ZiaSun Technologies with a year 2000 target price of $28.50 per share, which, relative to a current trading level of approximately $10 per share, indicates tremendous potential for investors over the short and long term.
ZiaSun is a profitable Internet incubator with rapid earnings growth and a very strong position in the financial, investment, auction and e-commerce sectors of the explosive Internet industry. The Company posted record fiscal 1999 results with earnings of $10.7 million, or $0.49 per share EBIT, on revenues of $27.2 million. It also reported dramatic balance sheet improvements with $20.2 million in total assets and $11.7 million in cash at year-end to aggressively pursue its growth objectives for 2000.
"We believe ZiaSun is a tremendously undervalued stock. Stockreporter believes that ZSUN could appreciate to trading levels in line with other companies in the Internet incubator sector. For example, Internet incubator CMGI is currently valued at roughly $80 per share with a $23.5 billion market cap, despite a net loss of over $300 million for the first six months alone," commented Stockreporter's Torsten Prochnow. "Stockreporter is recommending the purchase of ZSUN for investors who want to establish a position in the Internet incubator sector. We are anticipating that ZiaSun may be one of the top performers in that sector because of its continued strong performance in North America and its focus and early positioning in the Asia Pacific and European markets - the two regions generating the world's fastest growing Internet user base."
In addition to being a leading online investment education firm, ZiaSun is one of the few profitable companies in its sector and has achieved critical first-in positioning in various international Internet markets. ZiaSun also developed and owns some leading industry players, including the only online trading platform that specifically targets non-US investors and provides investors worldwide with access to major stock exchanges in the US, England and Hong Kong.
"We expect superior near-term earnings potential as ZiaSun accelerates its expansion into European markets through strategic alliances. We also foresee that dynamic share price appreciation will be driven by the Company's development efforts at the forefront of the WAP evolution. One of ZiaSun's goals is to capture the position as the number one Asian Internet portal. ZSUN also plans to apply for listing on AMEX once its 10K-SB filing is finalized," Prochnow added.
View the complete Stockreporter report on ZSUN, prepared by Christina Skousen, Registered Investment Advisor, at www.stockreporter.de.
DISCLAIMER
For more information, see www.stockreporter.de. We maintain close contact with institutional and private investors. Please feel free to contact us with any inquiries or suggestions.
Stockreporter, a service of World of Internet.com AG, is a leading European financial Internet publication located at www.stockreporter.de specializing in the coverage of micro-cap stocks and undervalued OTC and BB companies. Please read the complete Disclaimer and Discloser Statement at the web site. All statements are the opinion of Stockreporter, information is from sources believed reliable but cannot be guaranteed. Stockreporter personnel and associates may hold positions in securities mentioned and these positions may be increased or decreased in the future. Nothing contained herein shall be construed as a solicitation or offer to buy or sell securities or as investment advice. You are advised to obtain such advice from a qualified securities broker or investment advisor. Securities mentioned involve a very high degree of risk - please be sure to examine the company's financial statements and SEC filings (www.sec.gov) and perform other due-diligence.
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