The Wild, Wild Web
By Gregory Spears
In the untamed frontier of online investing bulletin boardsand
home pages, insider tips too often come from outlaws.
"DUMP YOUR STOCK NOW!!!!" shouted the urgent message sent
one recent Friday to misc.invest.canada, an Internet bulletin board about
Canadian stocks. "AND SHORT AS MUCH AS YOU CAN!!!!!! The
company will disintegrate as of Monday and all shareholders will be left
with absolutely nothing!" The subject of the "flame," as emotional
electronic messages are called: Urban Resource Technologies, a
money-losing recycling company in Vancouver, British Columbia.
The note caught the attention of followers of Urban Resource because it
was signed "billboy," the handle, or electronic nickname, of the biggest
booster of this long-shot penny stock. Urban Resource, which claims its
patented process converts worn-out carpets, old tires and other materials
into sturdy building materials, so far has no steady revenue; it stays afloat
chiefly by issuing more stock. But it does possess a World
Wide Web page to tell its story and a band of Internet adherents, who
own millions of shares.
Their chief cheerleader, "billboy," is William DeMorrow, a 55-year-old
estate planner from Clearwater, Fla. Almost every day, DeMorrow
e-mails a roundup on the company to 275 fellow investors and followers
of the stock. He calls them the Garbage Gang, after the company's line of
work. So if a bedrock believer like DeMorrow had lost the faith, others
were likely to conclude that the company was in bad shape.
But the note on the bulletin board was a hoax. And that, in essence, is the
problem with the Internet: You don't always know who you're talking to.
It could be a savvy investment wizard--a born stock picker--or a Wizard
of Oz using the anonymity of the Net to cloak the lever-pulling. Securities
regulators, mindful of the millions who are venturing into cyberspace for a
first look, are warning investors to be skeptical.
Slackers and Hackers
DeMorrow and the gang wanted to know who had written the fraudulent
post. The message did leave behind small bits of electronic evidence that
identified the hoaxer's Internet provider as a firm in Minneapolis. The
provider won't name the offender, but describes him as a
twenty-something slacker who lives with his mother, who may be a
stockbroker. "For whatever reasons--juvenile behavior more than
anything else--he just felt he would pull their chains by saying this stock
was going to crash," says a spokesman for the provider.
It didn't, which DeMorrow credits to his rapid online disavowal. "If I had
been on vacation," he says, "it could easily have created a situation where
they went into a panic sell." There was relief, too, at Urban Resource's
headquarters. Says Tony Canzi, architect of the company Web page:
"With a great communications tool like the Internet, a lot of real
boneheads can go out and do wacky stuff." And they do.
Rumor Central
The 17 million to 18 million Americans who log on to the Internet at least
once a week can summon up accurate and highly detailed financial
information. For example, the Securities and Exchange Commission's
Edgar site gives you access to millions of pages of filings by public
companies. (For other solid sources, see www.$$$.com, Oct.)
But the Internet has also replaced the cocktail party as the prime source
of hot stock tips. When you got a tip at a party, at least you knew who
was whispering in your ear--and what they'd been drinking. On the
Internet, it can be hard to tell whether you're getting a recommendation
from a broker, a short seller or an antisocial 20-year-old. "People tend to
think that the bad people on the Web are child pornographers, but there
are others out there, too," says Don Ulsch, senior vice-president at
O'Reilly Online Research Group. "The Internet allows virtually anyone to
create a Web site, and there is going to be the criminal element that uses
the Internet to rob you blind. That's the dark side of the Web."
Lisa Keefe, a business editor in Chicago, brushed the dark side when she
received e-mail from somebody who identified himself as Bob Williams.
"He jumps into this message," says Keefe, "as if we were familiar
business partners--no introduction or identification as to his position with
the company--saying he's heard that the Chancellor Group is reporting
greatly increased second-quarter earnings and plans a stock split at the
end of the month. He writes, 'Sounds like a pretty good deal to me.
What do you think?'"
Here's what we know: The Chancellor Group's 1995 annual report on
file with the SEC indicated it had interests in a slew of risky
businesses--oil and gas fields in Kentucky, cable-television licenses and
gold mines in Australia, timber in Fiji--but no salaried employees. One of
the company's executives, David Yeaman, paid a $3,000 civil fine in
1994 to settle a complaint brought by the New Jersey Bureau of
Securities that he was selling unregistered securities in that state. Yeaman
resigned from the company in July 1995 but retained a 20% ownership at
that time.
And who is Bob Williams, who sent the chatty post to Keefe (and many
other people as well)? He left a telephone number, but most of the time
when we called, his voice mailbox was too full to take a message. When
we did succeed in leaving a message, the phone answering machine
identified the firm as "Internet Marketing." Our calls weren't returned.
The Wild, Wild West
Sometimes the online touting is blatantly ludicrous. Last spring, for
example, the Web site for the Agency for Interamerican Finance crossed
the line when it offered "Interamerican hard-currency bonds" that were
paying a guaranteed rate of 11.75%. According to one report, would-be
investors were instructed to print out the purchase agreement, which
included a pledge to "refrain from any unethical practices or conduct that
could reflect unfavorably on AIF," and send it with a check for a
minimum of $2,500 to a post office box in St. John's, Antigua.
The whole thing was an "elaborate sham," according to the Securities and
Exchange Commission. No money was sent, authorities say, and the
SEC settled the case with a $5,000 fine in June. The home-page
creators, who neither admitted nor denied the charges, allegedly said at
one point that they were testing the Internet's promotional capabilities.
Another scheme offered an annual return of 200% to 420% on so-called
prime bank instruments. The securities, touted in messages on Internet
bulletin boards, were said to be insured against loss by a "prime bank
guarantee," a fictitious instrument. The scheme allegedly netted $3.5
million, says the SEC, which charged Renate Haag, of Malibu, Cal., and
Germany, and two men identified as her salesmen with fraud. A federal
judge in Massachusetts ordered Haag to return the money. She has not
responded. "As far as we know right now, she is not in the U.S.," says
Terri Tsagaris, a senior counsel at the SEC.
The best protection against online fraud is skepticism. "If something
doesn't make sense, you should be very careful," says Richard Jacobson,
the SEC branch chief who supervised the Haag investigation. "A lot of
these schemes we've seen promise unreasonably high rates of return with
little or no risk--the kind of offering that's literally too good to be true."
Penny Stocks on Parade
Stocks in start-up companies carry the biggest risk to investors.
Nevertheless, there's huge enthusiasm for these stocks online. Hope
springs eternal--and it invariably leads to one little company after another
being labeled "the next Microsoft."
"They may be great stocks, and they may be junk," says Jon Tara,
creator of the Stock Club, an Internet site. "The problem is when they're
presented to people as if they trade alongside IBM." Consider this recent
bulletin-board exchange concerning Trinity Biotech, an Irish maker of
quick-result HIV tests that reported its first quarterly profit (.001 cent
per share) for the quarter that ended June 30. Investor Mike Sawyer
sparked an online donnybrook by proclaiming little Trinity to be The
Next Big Thing:
"They will sell thousands of cases of HIV tests every month! . . .
Every person receiving medical care MUST be treated as if they
have AIDS! So every doctor and nurse in the country will want to
know for sure before they work on you."
A disbeliever who signs his notes JTR filed a riposte under the headline
"Time to Get Fleeced":
"Give em the whole story mike: lousy balance sheet, not even
applied yet for FDA [approval] while others have it, not a home
test. . . . How much are you in for/at what price?"
Sounding like a gentleman ready to call for pistols at ten paces, Sawyer
defended his honor:
"I have always given the whole story as I know it! But you sir have
not the slightest idea what is going on in the world of 'rapid result'
testing!"
Soon bystanders were taking sides:
"Who in the world are you, and why are you so aggressive and
angry at Mike?? Your posts make you sound like a real jerk."
Mock combat is always unspooling somewhere on the Internet. But these
semicomic confrontations can serve the serious purpose of exposing
weak reasoning or correcting mistakes. Skeptics can also frustrate
attempts to hype a stock, which Tara says is a central problem online.
"It's cheaper to push this stuff on the Internet than it is to buy radio time,"
he says.
Tara identifies those who seem to be hyping stocks on the Stock Club's
"pump and dump" page. One recent inductee was a man who posted
rapid-fire love notes about one company on several bulletin boards. "I
finally sent him an e-mail: 'Do you work for investor relations in this
company?'" Tara says. "His response was, 'I'm a director of the
company.'"
The Kid's Hot Stocks
No question: Online buzz gives some stocks a quick boost. There's
"a close correlation between Internet postings and changes in both
trading volume and price," the NASD recently concluded after an
informal survey.
One online outlet that may give the stock it spotlights a lift is the
Waaco Kid's Hot Stocks Forum. The Web site is open to all, but
"close to 1,000" people pay $10 a month for e-mail messages that tout
stocks, based on recommendations of other subscribers and tips from
online newsletter writers who go by names like the Phantom. Subscribers
get as many as a dozen messages a day from chief moderator Gayle
Essary, 56, who favors "story stocks," which he describes as companies
with "aggressive management that is very astute about disclosure." Essary
has invested some of his own money in them in the past, but says he tells
subscribers if he is passing along a pick on a stock that he owns.
On its Web page the Waaco Kid recently claimed an extraordinary 97%
average gain on the 53 stocks highlighted since May 1995. But that gain
assumes you always timed things perfectly--buying the stock on the day it
was mentioned and selling it at its subsequent peak (but the Kid doesn't
tell you when to sell). Trouble is, many of the stocks get an initial boost
from the online attention, then quickly plunge back to earth. If you'd
adopted a buy-and-hold strategy with the Kid's picks, you'd have a
23.8% average gain from May 1995 to mid September. And if you
eliminated one stock, which jumped more than 1,100%--from 25 cents
to $3.19--the stocks barely budged, returning an average 1.6%.
When the Waaco Kid spotlighted HealthTech International on
March 18, the little health-club chain's stock jumped from just
over $3 to $4 the next day--a 31% gain. But by April 10 it had fallen
to $2.50--an 18% loss from the first day. A disgruntled investor asked,
"What's going on? Every time supposed 'good news' comes out, the
price drops. . . . Please tell me you know something that will at least get
this stock up to $4 so I can get out."
Essary replied that the dissenter had a poor attitude. "Presentation is
everything," he wrote. "We have a means to make others see what we
see. If we see frustration and impatience, and telegraph that to others, it's
not going to have the desired effect."
Online Ostriches
Boosters of stocks on the Internet sometimes try to ignore bad news.
When San Francisco money manager Dave Hammond, 42, posted
negative notes about Iomega, a maker of computer storage devices, last
year to America Online's Motley Fool bulletin board, he says, "I got
some e-mail threats to my health and well-being."
Iomega was an online darling. Its stock rose from $3 in October 1995 to
$55 in May 1996 under glowing notices. Yet from a fundamental
valuation standard, the price was totally irrational, Hammond says. He
points out that at its peak, Iomega's market capitalization equaled that of
Seagate Technology, a maker of disk drives with ten times Iomega's
earnings. Online fans didn't want anyone to pour cold water on their
dreams of wealth, but since its May peak, Iomega shares have fallen to
$14.
"In the long run, fundamental valuation wins out," says Hammond. "But in
the short run, if enough players get involved in the stock, it becomes a
little like musical chairs before the music stops."
Meanwhile, in Florida, William DeMorrow is still enthusiastic about
Urban Resource Technologies' prospects of turning garbage into riches
for the company's investors. Last summer he even persuaded his stock
club (another online venture) to buy 15,000 shares. But what about the
balance sheets, which show a string of losses? "Don't read the
numbers--they're terrible," he admits. "The financials really stink."
Reporter: Marc L. Schulhof |
