Is This CNBC's Million-Dollar Winner?

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The penalty for failing to sign was stiff: "If you fail to return the attestation or your attestation is not truthful, you may be disqualified from the contest," wrote CNBC Vice-President of Marketing Tom Clendenin in an e-mail.

Prize Portfolio?

A close examination of Dondero's trading in the CNBC contest raises questions about his approach, but offers few definitive answers. The primary concern of other finalists was that Dondero was buying stocks in his CNBC portfolio and then driving up the price by buying the same stocks in the real market the next day. That's easier to do with thinly traded stocks than heavily traded ones. Dondero did pick some thinly traded stocks, but not all of those trades were successful. He also made other kinds of purchases that contributed to his portfolio returns.

In the final round of the CNBC contest, Dondero saw nice gains on picks of BioProgress (BPRG), a British pharmaceutical company, and Hanarotelecom (HANA), a Korean telecom company, which both trade on Nasdaq (NDAQ).

On a typical day, neither stock sees much action in the real world. BioProgress trades an average of 3,100 shares a day on Nasdaq, while Hanarotelecom averages 7,400 trades a day. But both saw huge jumps in volume in the days after Dondero picked them. Hanaro soared from close to 19,000 shares on May 14, to well over 27,000 the next day. Dondero realized a 6.4% gain for his contest portfolio, as the stock rose. The following day, when Dondero chose BioProgress, more than 5,000 shares changed hands, compared with zero shares the previous day. Again, Dondero saw a healthy gain of 4.5%.

Win Some, Lose Some

But Dondero didn't always make money on his thinly traded stocks. On May 21, he again picked BioProgress, and again volume spiked, this time to 23,000 shares from 1,400 the previous day. But Dondero lost 2.64% on the trade.

Other thinly traded stocks Dondero picked included Velcro (VELC), the famous fastener maker, and Macronix International (MXIC), a Taiwan-based manufacturer of computer memory. Neither were big winners for him in the final round.

Indeed, Dondero's biggest winner during the finals was Fremont General (FMT), the subprime mortgage lender whose stock trades an average of 4 million shares a day. Dondero picked the stock on May 22 and after the market closed that day, the company said that it would sell its commercial real estate business for $1.9 billion. The news drove shares up 26.7%, a huge one-day gain in the contest.

Dondero's picks in CNBC's contest could be examined as part of the cable channel's investigation into "unusual trading." Beyond looking at traders who may have benefited from its own software glitch, CNBC says that it has retained an "independent securities expert" to look into allegations of market manipulation. CNBC declined to comment for this story. But it previously said, "Integrity is paramount to CNBC. We are taking all allegations of improprieties very seriously."

Dondero's Background

If CNBC looks at Dondero's picks, it wouldn't be the first time his trading has been the subject of a probe. The NASD records say that he was the subject of the regulator's inquiry letters because of "wash" trades, among other things. Wash trading is when someone buys and sells the same security simultaneously—or in quick succession—to create the appearance of active trading. It can be done to generate commissions for a broker or for tax purposes.

The New Jersey Bureau of Securities records pertain to Dondero's time at a day-trading firm in Iselin, N.J. called Evolution Financial Technologies. The records say that, "As a result of his trading activity, Mr. Dondero was on heightened supervision and probation which resulted in his changing from a proprietary trading to a customer. This did not involve customers or a loss."

Dondero, who attended the College of New Jersey until 1999, has worked at a series of small financial firms. One of them, Heartland Securities, was sued by the Securities & Exchange Commission for alleged stock manipulation and falsifying records. Heartland closed in 2003 after two executives, Sheldon Maschler and Jeffrey Citron, paid $29.2 million and $22.5 million, respectively, without admitting or denying wrongdoing. (Citron went on to found the Internet phone company, Vonage Holdings (VG)). Dondero was at the firm after the alleged wrongdoing, but before the settlement.

After BusinessWeek asked Dondero for comment on his background and his trading, a reporter said he wanted to make clear that the story would proceed with or without Dondero's cooperation. "You gotta do what you gotta do," he said.

Catts is a reporter for BusinessWeek.com.