E-Bears Are Out to Spoil the Online Stock Hype Picnic

NEW YORK —  FinancialWeb.com is an Internet “story stock” with a twist.

Like many another Internet highflier, FinancialWeb has seen its share price explode despite tiny revenues and nonexistent profits.

After trading as low as 25 cents last May, the shares rocketed to a high of $26 in January, for an eight-month gain of 10,000%--impressive even by frothy Internet stock standards.

And what is FinancialWeb’s e-business concept? Operating Internet sites that warn investors away from over-hyped stocks.

Just as the Net has become a vast haven for stock promoters, the online community also is nurturing a growing culture of “contrarians,” amateur detectives and short-sellers who are as interested in deflating hyped stocks as the promoters are in puffing them up.

These electronic Robin Hoods populate a world that is studded with ironies--a place where teenagers masquerade as Wall Street savants and where one of the best-known whistle-blowers, who goes by the alias “Pluvia” (Latin for “rain”), has had his own share of controversy.

Traditional short-sellers--traders who target what they believe are overpriced stocks, borrowing the shares from brokers to sell them, in the hope of buying them back (and repaying the loan) later at much lower prices--have had little to brag about in recent years.

The historic bull market has sent many old-time short-sellers to the sidelines, including Palo Alto’s Feshbach brothers, superstar shorts of the 1980s who helped expose such notorious swindles as ZZZZ Best, the phony carpet-cleaning firm headed by Reseda wonder boy Barry Minkow.

The Internet’s resident e-bears, by contrast, seem to be on the rise--at least in number and influence if not in investment performance. Their returns are impossible to measure because, like much of what one encounters on the Net, their claims often can’t be taken at face value.

Typically operating under screen names, or aliases, the e-bears trade information on Internet message boards operated by Yahoo, America Online and Silicon Investor, among others.

Many are nonprofessionals who analyze firms in their spare time and occasionally team up with one another to carry out coordinated “raids” on stocks they consider overblown or downright fraudulent.

The e-bears engage their opponents--stockholders and other supporters of the target companies--in no-holds-barred combat on the message boards.

With money and ego at stake and without the restraint that comes with using real names, civility wears thin. Personal attacks, sexual and scatalogical invective, even threats of violence are all part of the mix.

The Princeton Debate Club it isn’t.

John J. Reed, president of Source Media, witnessed an online swarm firsthand last summer. In early July, Source Media, a Dallas-based interactive-TV company, became the subject of persistent takeover rumors.

On July 14, with the Dow Jones wire service reporting “unconfirmed market talk” of a bidding war involving AOL and Microsoft, the shares surged 50% to $32.25 on more than 10 times usual trading volume.

When the rumored takeover failed to materialize, Source Media was set upon by online bears. Their attacks and lawsuits filed by disgruntled shareholders battered the stock to a low of $4.94 on Oct. 7.

The suits allege that SourceMedia concealed revenue shortfalls and accounting irregularities, causing earnings and assets to be overstated. The company says the claims are baseless.

Although the legal action is pending, the online swarm has abated and the stock has climbed back to $17.13--a few dollars above where it stood a year ago.

“The Huns attack the village and the Huns move on,” Reed remarked in a telephone interview.

Beware the Anonymous Source

While acknowledging that information from online critics can be “very useful and credible,” Securities and Exchange Commission enforcement chief Richard H. Walker offered this rule in a recent interview: “Never rely on investment advice--positive or negative--from an anonymous source.”

What purports to be objective commentary can be a bramble of undisclosed interests and outright deceptions, he said.

For example, according to Walker, the agency once learned of a Web site fraudulently touting the “top 10 stocks recommended by the SEC.” When investigators tried to reach the promoter by phone, they were told, “He’s not home from school yet.”

Walker’s rule about anonymous sources is easy enough to obey when contemplating popular stocks such as Wal-Mart or Cisco Systems, for which there is plenty of legitimate research available from Wall Street.

But sometimes the only sources of information about “micro-cap” firms are promoters who are paid to puff them up with optimistic and sometimes misleading projections.

Many such stocks trade on the electronic OTC bulletin board, a largely unregulated market.

For investors trying to assess stocks’ real value, the Internet’s e-bears can help balance the exaggerated claims of promoters and wishful thinkers. Sometimes the e-bears uncover real wrongdoing.

Although much of their work is noticed only by those who frequent the Net message boards, the online bears have had a few victories that got wider attention:

* The SEC, in its ongoing investigation of Internet-based fraud, has in recent months cracked down on several online stock-touting operations that were earlier exposed by FinancialWeb’s Stock Detective site (https://www.stockdetective.com).

The agency accused promoters of failing to disclose--as required by law--that they were being paid in cash or stock to sing the companies’ praises on their Web sites.

The sites included Stockprofiles.com,StocksToWatch.com and Future Superstock, all of which sometimes follow micro-cap companies.

* In an unusual action in late January, the SEC simultaneously halted trading in six micro-cap stocks, four of which had been the subject of an expose on a Silicon Investor message board by Net short-seller Pluvia.

The companies Pluvia cited included Net-related firms Citron and Electronic Transfer Associates.

The SEC followed up in mid-February by charging Glitterglove Investments, an Irish investment company, with illegally selling unregistered shares in the two firms.

Citron traded most recently at 25 cents, down from a closing high of $19 on Jan. 25. Electronic Transfer has plunged to $1 from a Jan. 22 high of $26.50.

* E-bears were ahead of many conventional analysts last year in spotting trouble at Philip Services, a big scrap-metal firm based in Hamilton, Canada.

Huge write-offs that the company blamed on unauthorized copper trading and other problems hammered the stock from $20 a share in 1997 to 28 cents in January when it was suspended from trading on the New York Stock Exchange.

The former head of the company’s metals division said in court documents that corporate officials, far from being unaware of the copper speculation, had ordered him to engage in it, according to Canada’s National Post newspaper.

But if the e-bears are helpful in exposing over-hyped stocks, they are no more popular in the corporate world at large than short-sellers were in the days of Jesse Livermore, the legendary “Prophet of Loss” who got rich selling Union Pacific short just before the San Francisco earthquake and fire of 1906, got richer in the great panic of 1907, and was a leading naysayer before the crash of 1929.

Some firms targeted by Internet attacks have fought back with defamation lawsuits; others are pushing for regulations to control the vehemence of the discourse.

In the libertarian culture of the Net, where privacy and freedom of speech trump all other rights, the firms pushing for restrictions are broadly denounced for trying to silence their critics.

Still, some of the tactics used against Philip Services on a Yahoo message board have been extreme by any standards.

“I saw you last night,” read a message last May directed to Allen Fracassi, executive vice chairman. “Your light was on. I was watching you. I know how afraid you are now.”

Another message, aimed at Herman Turkstra, a company director, referred to the recent discovery of a body in a nearby bay: “We know its [sic] not you this time, Herman.”

Philip Services used a court order to obtain information from Yahoo that helped it track down the authors. The company is still considering further legal action.

Pursuing its stated mission of exposing hype and fraud, FinancialWeb has twice been sued by targets of its reporting, according to Kevin Lichtman, company president.

Lichtman, who runs the company from Altamonte Springs, Fla., declined to discuss the suits in detail because they are pending.

FinancialWeb tries to cover some of the same turf as Pluvia and other e-bears, but in a more formal way, with multiple research-oriented Web sites, of which Stock Detective is probably best known.

Other e-bears have by no means overlooked the irony that FinancialWeb itself has some of the same characteristics as firms listed in the “Stinky Stock Roundup,” a regular feature of the Stock Detective:

* The company was created in 1997 through a 1-for-25 reverse stock split in which it absorbed a publicly traded but inactive Rancho Mirage company called Peppermint Park Productions. It has since undergone two name changes.

Although many “penny stocks”--stocks that sell for less than $5--undergo name changes and reverse splits, both can be warning signs of companies with little financial substance.

* Under its previous name of Axxess, FinancialWeb was one of 10 micro-cap stocks that BusinesssWeek magazine, citing unnamed sources, said in December 1997 had been the subject of payoffs to brokers.

* The company’s shares leaped from $3.88 by Thanksgiving to $8.88 by Christmas Eve. After a brief pause, the stock exploded again, tripling to $26 a share on Jan. 20. This occurred without any significant news developments other than the name change from Axxess to FinancialWeb.

Of course, the same period saw an equally powerful rally in other Net-related stocks.

But even in that crowd, FinancialWeb’s valuation is ionospheric.

According to unaudited financial statements available on its Web site, FinancialWeb had losses of $492,801 on revenue of only $41,930 in the six months ended last June 30.

With 3 million shares outstanding and a current stock price of $16.88, the company’s market capitalization is $50 million. If full-year revenues exploded to, say, $200,000, the company would still sell for 250 times revenues--far more pricey than such Net highfliers as Yahoo, Inktomi or Ebay.

E-Bear Trustworthiness?

Lichtman acknowledged in a telephone interview that critics have had fun noting the similarities between FinancialWeb and the “stinky stocks” it spotlights.

But he strongly denied the BusinessWeek allegations and said the company is planning to start providing regular, audited financial statements.

Lichtman added that one of the firm’s main online critics is a business rival with a competitive motive for disparaging FinancialWeb.

Short-sellers attacking other short-sellers? It begs the question: Are the e-bears, in the end, more trustworthy than the stock touters they try to deflate?

Short-sellers have long argued that it is far harder to keep a good stock down than to pump a bad one up. And in any case, they point out that online stock skeptics are vastly outnumbered by the cheerleaders.

The SEC, in a new guide to avoiding online stock fraud, available at its Internet site (https://www.sec.gov), offers this rule, boilerplate though it may sound: “Never, ever make an investment based solely on what you read in an online newsletter or bulletin board posting . . . and don’t even think about investing on your own in small companies that don’t file regular reports with the SEC unless you are willing to investigate each company thoroughly and to check the truth of every statement about the company.”

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Times staff writer Thomas S. Mulligan can be reached by e-mail at [email protected].

* PLUVIA’S STORY: The tortuous tale of one of the Net’s most famous e-bears. C4