SEC Probes Day Traders Site For Payoffs in Backing Stocks
By SUSAN PULLIAM and REBECCA BUCKMAN
Staff Reporters of THE WALL STREET JOURNAL
The Securities and Exchange Commission has launched an inquiry into activities at Day Traders On-line, a Web site that offers fast-action trading tips and stock recommendations to day traders.
The inquiry, which began March 23, is focused on whether Day Traders On-line, or its founder, Ray Johns, 33 years old, received compensation from certain companies in connection with stock recommendations made by the Internet service, people close to the inquiry say. The SEC also is looking more generally into other practices at the online service, these same people say.
Mr. Johns said his firm, as a matter of policy, doesn't comment on SEC investigations or inquiries. "However, if we are contacted by them, we provide whatever information they request," he said. He strongly denied that Day Traders On-line had ever received payments from companies whose shares it recommended to subscribers, who pay more than $100 a month for the service.
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"We don't get any compensation directly or indirectly from any company, any stock, or any promoter whatsoever in relation to the recommendations we make on our site," Mr. Johns said, adding that company policy also forbids employees of the site from trading recommended stocks. An SEC official declined to "confirm or deny" that the agency began an inquiry.
The inquiry is one of the latest in a series by the SEC in recent weeks of practices among a new breed of sites on the Internet that aggressively promote their stock recommendations in "real time" chat rooms, occasionally contributing to substantial movements in their targeted stocks.
The probes show that regulators are trying to step up oversight of stock discussion in cyberspace, where the actions of stock promoters can have a greater effect than the old-style "tip sheets" for instance, since recommendations can be disseminated on the Internet to millions of investors instantaneously. But these sites are proliferating, making it ever more difficult for the SEC to police them.
In addition to the inquiry into Day Traders On-line, the SEC has also contacted well-known Internet stock guru Joe Park, a.k.a. TokyoMex, who runs his own Web site and is active on many Web message boards, Mr. Park said. He has denied wrongdoing. The SEC has also requested five years of trading records from Chris Rea, the founder of a chat room run by Trading Places Inc. in Niles, Ill., people familiar with the matter say. Mr. Rea has said that he has nothing to hide. The agency was also said to be looking into Trading Places' financial relationships with brokerage firms, including MB Trading Inc., which until recently was recommended to subscribers on the Trading Places' Web site.
Many day traders migrate from Day Traders On-line to Trading Places and back again, traders say. Trading Places, however, focuses on relatively large Internet stocks, hoping to gain from big run-ups in price. Mr. Johns's service has recommended shares of smaller companies, often sending out news releases highlighting his successes.
For example, a release last fall carried the headline: "Day Traders On-line subscribers bring in big profits on broadcast.com Inc. with gains of as much as 45%." A June release said that subscribers "Hit Big on Rambus, Pairgain, Cisco and Other Tech Stocks This Week."
Also last year, the Web site issued a few "research alerts" with "buy," "speculative buy" and "speculative trading buy" ratings on some stocks, although the site isn't a registered broker-dealer or investment adviser. In May, Day Traders On-Line upgraded shares of medical-supply distributor PSS World Medical Inc. to "buy" and added it to a "recommended list," setting a three- to six-month price target of $16 to $18 a share. Shares of the Jacksonville, Fla. company, which has suffered lower-than-expected earnings recently and said last month that the SEC is reviewing some of its previous financial reports, rose 15.625 cents to $8.96875 in Nasdaq Stock Market trading Thursday. Mr. Johns notes, however, that the stock rose to the low 20s late last year, allowing his short-term traders to post gains.
Among others, Mr. Johns's Web site also assigned "buy" ratings last year to Paymentech Inc., a Dallas provider of electronic payment systems that has now passed Day Traders' price target; and Electronic Communications Corp., a Melville, N.Y., cellular-phone company that has since changed its name to Northeast Digital Networks Inc. The company was delisted from the Nasdaq SmallCap Market in January and now trades for pennies on the over-the-counter bulletin board. Day Traders' near-term price target for that stock was only $1, Mr. Johns notes, and it was recommended only for investors "who maintain an aggressive, high-risk portfolio."
Mr. Johns said he started his Web site about three years ago after deciding he and his friends could chat about stocks more easily through a common Web site. "For a while, we just had three or four guys who were talking over e-mail," he said. "These were just friends of mine. I'd see them at lunch."
Since graduating from high school, Mr. Johns says he has owned several businesses, including a computer consulting company, and worked as a computer programmer. "But I've been playing the market... .since 1983," he says, adding that he first got interested in stocks from a high-school economics class.
The "main trader" on the Day Traders Web site -- the figure who actually monitors incoming news stories and picks interesting stocks throughout the day -- is a mysterious, 44-year-old sage known only as "DT." Explains Mr. Johns: "We don't disclose last names for security reasons.
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