Is This CNBC's Million-Dollar Winner?

A day trader whose activities have drawn regulators' scrutiny could end up taking home the big check

by Tim Catts

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As CNBC investigates allegations of improprieties in its million-dollar stockpicking contest, the cable channel may end up disqualifying some of the top 20 finishers for artificially inflating their returns in the competition. Depending on which, if any, of the top performers are ruled out, CNBC could find itself writing a million-dollar check to a day trader who had a run-in with securities regulators and has drawn attention from other finalists for what they consider suspicious trading.

The man is Joe Dondero, who finished fourth in the contest with a total 32% return, and works as a trader at Visionary Trading in New Jersey. According to records from the National Association of Securities Dealers, Dondero was "the subject of multiple NASD inquiry letters." Records from the New Jersey Bureau of Securities show that he was "discharged" from one securities firm for his trading activity.

Dondero declined to comment on his work history or his trading for this story. Reached on the afternoon of June 13 at a local horse-racing track, he said, "I'd be happy to talk after CNBC comes out with something, but until then I have no comment."

CNBC Probes Improprieties

Anointing Dondero as the million-dollar winner would make for quite a finale for the American Idol of the stockpicking set. CNBC, part of General Electric (GE), launched the contest in March and attracted 375,000 participants with heavy promotions from popular anchors such as Joe Kernen and Becky Quick. It nearly tripled traffic to the channel's Web site, as CNBC.com profiled the top performers and viewers weighed in with comments on their favorites.

But as BusinessWeek first reported on June 7, a design flaw in CNBC's own software appears to have allowed certain contestants an unfair advantage in the popular game (see BusinessWeek.com, 6/7/07, "CNBC's Easy Money"). The technology reportedly allowed contestants to see which stocks were rising in after-hours trading and then to buy those stocks at the lower, 4 p.m. EST closing price. That lead to certain finalists showing a pattern of consistently picking stocks that took off after the closing bell on strong earnings reports.

Such a pattern could now lead to disqualification. On June 8, CNBC put out a statement saying it is investigating improprieties in the contest, and specifically mentioned contestants who were "able to change their trades after the markets closed" (see BusinessWeek.com, 6/8/07, "CNBC Concedes Flaws").

Dondero's trading doesn't match that pattern, which means he could be in line for the grand prize. He cracked the top five in the final round of the contest, largely with picks of relatively small companies that have very thinly traded stocks.

Manipulation Waiver

His trades drew criticism from other finalists, nonetheless, with at least three contestants complaining about his choices early in the final round. Because Dondero was picking thinly traded stocks in the CNBC contest, the other finalists worried that he could be manipulating the prices of those stocks in real-world markets. "He only picked stocks that could be manipulated," says Jim Kraber, one of the finalists who says he flagged CNBC. Kraber emphasizes that he has no way of knowing whether Dondero was indeed manipulating stocks.

CNBC took somewhat-belated action to prevent such manipulation. BusinessWeek has learned that on May 18, midway through the final two-week round of CNBC's contest, the cable channel asked each of the 20 finalists to sign a statement that any real-world trades they made were not "for the purpose of, or with an intent to, affect or manipulate the price" of the stocks they were picking in the contest.