INVESTING: It's an
unregulated stock-quotation
system. But peril aside, the
Bulletin Board is hot.
Meet Dragon Energy Group
Inc., a small Irvine company
that owns 80 percent of a
power plant in China.
Last fall, Dragon didn't exist.
The company was known as
Vialux and it had just agreed to
buy undeveloped property near
Monterey.
A year before that, Vialux
didn't exist. Then, the company
was called Allied
Biotechnology and it sold
products to enhance hair
regrowth.
Make your head spin? The
OTC Bulletin Board, the
backwater stock-quotation
system on which Dragon's
shares can be found, is home to
hundreds of such chameleons.
Company histories get
rewritten daily. Futures often
are vague at best. It's a virtually
unregulated market, frought
with everything from heavy
losses to investment fraud.
There's also the occasional
financial jackpot.
Dragon may well become a
great success. But it's hard to
imagine a company such as
Dragon surviving on one of the
large stock exchanges. Indeed,
their rules generally prohibit
trading of companies that, like
Dragon, don't report financial
results or meet certain trading
requirements. The Bulletin
Board, though, welcomes the
Dragons of the world with open
arms.
As informal as the Bulletin
Board sounds, it is exploding.
Today, nearly 6,400 companies
are quoted on the Bulletin
Board, up 9 percent from a
year ago. What's more,
investors traded nearly $5.5
billion of Bulletin Board stocks
in March, up 69 percent from
March 1997.
To some, the Bulletin Board is
pure capitalism _ a place where
companies with barely a hint of
a financial plan convince
investors to take a chance. To
others, the system is a breeding
ground for fraud _ an invitation
for hucksters to take advantage
of naive investors hoping for
the big hit.
The Bulletin Board is a loosely
regulated service that posts
real-time stock quotes, last-sale
prices and volume information.
All it takes for a stock to trade
on the Bulletin Board is a
sponsoring brokerage firm,
which generally then controls
the market for that stock.
Unlike their counterparts on the
New York and American stock
exchanges or the Nasdaq
market, Bulletin Board
companies need not file
periodic financial information
with the Securities and
Exchange Commission for
investors to inspect. And half
of the Bulletin Board
companies don't.
But as the Bulletin Board has
grown, regulating it has
become increasingly unwieldy.
And investors get lulled
because they can call up a
stock quote or find a research
report for a Bulletin Board
company just as they can for
companies that trade on the
Nasdaq or the New York Stock
Exchange.
''For many investors, it has the
look and feel of the regulated
markets, such as the Nasdaq,
the New York and the Amex,''
said Barry R. Goldsmith,
executive vice president of
enforcement for the National
Association of Securities
Dealers' regulatory division.
''People don't necessarily
understand what it is.''
As the Bulletin Board has
grown, so have the small-stock
scams. The SEC believes that
investors were bilked out of $6
billion last year in small-stock
fraud, with a large chunk of
that attributed to Bulletin
Board companies.
The most common Bulletin
Board stock scam is a so-called
''pump and dump'' scheme.
First, the perpetrators
accumulate a large block of a
company's stock, then start
hyping it through misleading
news releases and bogus
postings on Internet bulletin
boards. That's the pump.
Investors get suckered into
buying the stock, either
believing the hype or jumping
in to catch a ride on the stock's
momentum. As the shares soar,
the perpetrators sell. That's the
dump.
Scams often start with
cold-calling. A young broker
with a script working from a
boiler room phones potential
investors with a high-pressure
offer to get in on ''a great
investment opportunity.'' They
rarely take no for an answer.
The SEC said cold-calling
abuses represent the
fastest-growing category of
complaints, jumping more than
23 percent last year.
If this is a market where many
investors get stung, why is it
growing so rapidly? Because it
plays off the optimism in the
overall stock market, said
Goldsmith. More and more
investors want to cash in on the
historic seven-year bull market.
Add the Internet to the mix. It
provides a convenient way for
stock touts to hype stocks that
otherwise couldn't find buyers.
Finally, the Bulletin Board
plays to the lottery dreams of
investors who are new to the
stock market and hope for a
quick killing.
In perhaps the most publicized
small-stock fraud case,
regulators shut down A.R.
Baron & Co., a New York
brokerage, for rampant
unauthorized trading in
customer accounts. The SEC
accused the firm of
manipulating the stocks of two
companies and swindling
customers out of $17 million.
The case is still pending, but a
few former Baron executives
have pleaded guilty and agreed
to help prosecutors.
In the past few months, the
stocks of two Orange County
companies _ Shopping.com and
Veronex Technologies _ have
more than tripled in frenzied
trading, only to taper off after
investors began having doubts.
Shopping.com, a money-losing
Internet retailer, went public in
November at $9 a share and
jumped to more than $32 in
March. Ten days later, the SEC
suspended trading in the
Corona del Mar company's
shares for two weeks,
concerned that the stock run-up
may have been the result of
''manipulative conduct.'' The
company has acknowledged
that two regulatory agencies
are investigating.
At Veronex, a software maker
that says it has the solution to
year 2000 computer-glitch
problems, the stock climbed
from $2.75 in early February to
$13.75 in early April.
Irvine-based Veronex had no
new contracts or major
announcements. But it did pay
investment advisers to issue
research reports, which
compared the company to
Microsoft and called its
product a ''silver bullet.''
Both companies deny any
wrongdoing. But the curious
trading of their shares
highlights the chaotic nature of
the Bulletin Board.
To be sure, the Bulletin Board
isn't a complete cesspool. Many
small community banks and
some established foreign
companies' American
depository receipts _ or ADRs
_ are listed on the Bulletin
Board. And there are the
occasional diamonds in the
rough.
Though hardly a Microsoft,
Fireplace Manufacturers Inc. of
Santa Ana was a home run for
investors who bought the stock
in its early days. The company
muddled along for several
years before a fake-log maker,
Desa International, agreed to
buy it for $23 million in
March. That meant a 20-fold
gain for investors who picked
up the stock two years ago.
But the real dream for most
reputable Bulletin Board
companies is to move to the
Nasdaq stock market or the
American or New York stock
exchanges. Endocare Inc., an
Irvine maker of devices to treat
prostate disease, began its life
on the Bulletin Board when it
was spun out of Medstone
International Inc. in 1996. A
year ago, it graduated.
''There is a stigma associated
with being a Bulletin Board
company,'' said Endocare's
chairman and chief executive,
Paul W. Mikus. ''The reason
we wanted to move to the
Nasdaq market was to make the
next stage of investors
available to us.''
With so many dubious
companies trading on the
Bulletin Board, some investors
simply shy away from all such
companies for fear of getting
burned. The bylaws of many
institutional investors, for
example, bar Bulletin Board
stock ownership.
In some investors' eyes,
Endocare wasn't any different
from its more speculative _ or
even corrupt _ Bulletin Board
brethren. So while the Bulletin
Board gave Endocare a
springboard to the public
markets, it also limited its
access to investors.
''Our institutional ownership
has really grown quite
dramatically since we moved to
the Nasdaq,'' Mikus said. ''As a
CEO of a company, it's not
clear to me why you wouldn't
want to make that step.''
Bulletin Board companies fall
pretty much into three groups _
the small potatoes, companies
without enough business to
rank on the major stock
exchanges; the
works-in-progress, firms with
ideas but no sales; and the
fallen angels, companies
disgraced by bad news that sent
them tumbling to the investing
netherworld.
Bank of Orange County is one
of those small-potato stocks, a
company that is publicly traded
but closely held. Newriders, a
Newport Beach-based
motorcycle-themed restaurant
chain beginning to open new
locations, is a work in progress.
And Home Theater Products is
a fallen angel, an audio-video
company whose executives
pleaded guilty to bank and
securities fraud for fabricating
millions of dollars of business.
Although the company has no
business to speak of, its shares
still trade for fractions of a
penny.
Orange County's Bulletin
Board issues run the gamut.
There are Netbet and Xtranet
Systems, two Internet gambling
outfits. The county is home to a
few golf-related Bulletin Board
companies _ CEC Properties,
Golf Gear International, Grip
Technologies, Network
Holdings and Renaissance Golf
Products. And there are mining
companies Gentry Steel,
Intergold and Vega-Atlantic.
There are established
companies, such as Alliance
Imaging, which operates
medical imaging equipment
and is owned largely by New
York investment firm Apollo
Management. It moved to the
Bulletin Board in December
because not enough of its
shares were available for
trading by the public.
And there are young
companies, such as Pacific
International Enterprises, a Los
Alamitos business trying to
make it in the cutthroat world
of snowboard manufacturing.
It's often those young
developing companies that are
prime candidates for hype.
Take Prolong International
Corp., for example. The Irvine
company sold $29.8 million in
auto lubricants last year. It's a
young company trying to find
its niche in the automotive
world, and has even lured
race-car legend Al Unser to
endorse its products.
But Prolong also found itself
profiled on a stock-touting
television program, Emerging
Company Report. Actually, it
paid for that privilege. The
show, which airs on cable
channels in 140 markets each
week, profiles two companies
each show and charges each
one $8,500.
''Perhaps this week's guests are
the next Microsoft or Intel!''
Emerging Company Report
suggests in a news release
about last month's program.
The idea is to expose viewers
to companies they might not
otherwise find out about, said
Donald A. Baillargeon, one of
the program's co-hosts.
''We don't have the ability to
perform a financial analysis of
these companies,'' Baillargeon
said. ''We do our level best to
make sure the companies we
profile are legitimate
companies.''
It is a subject Baillargeon
knows something about. Before
working for Emerging
Company Report, he was a
spokesman for Alliance
Industries Inc., a
Bakersfield-based Bulletin
Board company. The SEC
suspended trading in the
company's stock in November
1996, and it hasn't resumed.
Baillargeon said the agency is
investigating allegations of
stock manipulation.
Perhaps what's most ironic
about the skulduggery on the
Bulletin Board is that the
Bulletin Board itself was
created to curb fraud. The
system's roots run directly to
the SEC's Penny Stock Task
Force, created a decade ago to
stem the last outbreak of fraud
in small-company stocks.
Previously, investing
information about
small-company stocks could
only be had from the so-called
''Pink Sheets,'' daily lists of bid
and offer prices for stocks that
were often outdated by the time
they hit a broker's desk. The
Bulletin Board became the
automated alternative to the
Pink Sheets, offering real-time
price and volume information.
In addition, the Bulletin Board
gave regulators the ability to
monitor trading more closely.
These reforms, however, still
did not reduce fraud in trading
of Bulletin Board stocks. Last
winter, the NASD approved
more changes that would
require all Bulletin Board
companies to report financial
information to the SEC and all
brokers to review the
companies' financial statements
before recommending them.
The SEC still must approve the
NASD's proposals.
SEC Chairman Arthur Levitt
told a securities trade group
last month that the agency
would have ''zero tolerance''
for brokers who abuse Bulletin
Board stocks.
''These rogue firms are
professional only in the sense
they have mastered the art of
hucksterism, of preying on
investors' lack of
sophistication,'' Levitt said.
''When one of their brokers
picks up a phone, it's almost as
dangerous as when a drunk gets
behind (the) wheel.
Mr Metals
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