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Web Of Hype And Glory


Cover Story -- Online

WEB OF HYPE AND GLORY

Vast, user-friendly resources make the Internet a rich research tool--but traps abound

When Jean Mobilia surfs the World Wide Web, or prowls the message boards of America Online, her interest is far from casual. One favorite stop is the EDGAR database of corporate filings, hosted by the Securities & Exchange Commission. "I keep an eye out for [SEC form] S-1s, which often disclose insiders selling stock," says Mobilia. Often, she has found, stock runups have a way of preceding insider sales--a sneaky little "coincidence" that Mobilia tracks through stock-charting services on AOL and the Internet. Insiders profit from the runups--and, thanks to the Internet, so does Mobilia.

This is the kind of sophisticated security analysis that pros have been doing for years, using expensive databases and SEC-document retrieval services. But the 32-year-old Mobilia is no Wall Streeter. She is an executive recruiter in Los Angeles--an amateur, part-time investor who is totally self-educated in finance. And she doesn't use costly services. Her gumshoe work, which includes sorting through reams of SEC documents that can cost thousands of dollars from document services, sets her back all of $19.95 a month--the cost of an AOL subscription.

ROGUE WATCH. As Mobilia's experience indicates, the Internet has become a routine tool, even a necessity, for investors, both small fry and pros. The dangers of old--Internet scams--are still worrisome. But overall, the good has come to far outweigh the lousy. Today, online resources are huge, and increasingly user-friendly. The message boards of the Internet as well as America Online (which hosts Business Week Online) have become "must read"--particularly for investors who track small over-the-counter stocks that are little followed by the Street. "I use the message boards and chat rooms to do my due diligence--to find out if a company is hyping its stock," says one prominent short-seller who requested anonymity. But so can the little guy, for the Net has helped level the info playing field.

The amount of useful information that has come online in recent months is staggering. It includes filings for just about every company and mutual fund, available through a vastly expanded SEC Web site. Virtually every major company has its own Web site, and they can vary from totally useless to valuable sources of corporate insight. Even SEC and National Association of Securities Dealers disciplinary actions are available to anyone with Internet access, thus giving some investors the ability to watch out for rogue brokers--though disciplinary histories remain offline so far. Internet indexes such as Yahoo! and Web sites sponsored by companies, publications, and exchanges are among the multitude of research tools that can prove invaluable for investors (chart).

That's a far cry from the state of affairs barely two years ago, when the Internet and online services were a kind of Dodge City--wild, freewheeling, and even lawless. Internet message boards and World Wide Web sites had begun to attract a small but dedicated cadre of computer-savvy investors, who often fell victim to stock promoters and "pump and dump" scam artists. They would buy shares, push them on the Internet, and then sell them, leaving small investors holding the bag. Promoters and scamsters are still out in force on the Internet--and can present a serious danger for investors.

Also potentially troublesome is the naivete of self-appointed gurus, who are a source of hype--and sometimes enlightenment--on the Internet and AOL message boards. Elsewhere on AOL, the Motley Fool investment site has developed a following. Alas, investors who replicated the much-ballyhooed "Fool Portfolio" a year ago, when its popularity was at its peak, have seen their holdings decline 27% because of some less-than-propitious stock picks.

The worst abuses, however, are being curbed. Once somnolent federal and state regulators have begun a crackdown, pursuing online stock scams, notably Internet newsletters and message boards where stocks are promoted. One growing problem that barely touched online investors until recent months is junk E-mail, or "spamming," as a medium for stock promoters. "It is one of the main areas we receive complaints about nowadays," says John Stark, an SEC special counsel who heads the agency's Internet task force. Regulators note that investors also remain frustratingly vulnerable to stock promoters on the Web, on message boards, and in chat rooms. "There's been such a bull market for such a long time, people forget there's no such thing as a free lunch," says SEC enforcement chief William R. McLucas.

CRUCIAL ISSUE. Some recent SEC enforcement actions show how lucrative Internet stock-pushing can be. One Internet newsletter publisher, Florida-based George Chelekis, was accused by the SEC in February of receiving some $1.1 million in cash, and 275,500 shares of stock, from companies promoted in his Web site without making proper disclosure to subscribers of his widely publicized newsletter, Hot Stocks Review. By contrast, an SEC official observes, Chelekis received only about $37,000 from subscribers over a 14-month period. Chelekis, who neither admitted nor denied the allegations in settling the SEC lawsuit, did not respond to an E-mail to his AOL screen name. He no longer maintains a phone listing for the newsletter, which apparently has ceased operating on the Internet.

Another recent SEC enforcement action could end up setting legal boundaries for actions against online newsletters. In mid-May, the agency alleged in a lawsuit that Shannon Terry, a writer for another Internet newsletter, SGA Goldstar Research, ran afoul of the securities laws by netting $850,000 in free stock for touting Systems of Excellence--whose former chairman was recently jailed for stock fraud--as well as 17 other stocks. Terry's lawyer, S. Lawrence Polk, says that he is vigorously contesting these allegations.

If the Terry case is litigated, it might well resolve a crucial issue--how much people can say about investments on the Internet without running afoul of the law. Chelekis and SGA both disclosed that companies pay to get their names on their Web sites. But the SEC has asserted that newsletters must disclose the specific payments they receive for each stock. "The SEC has never issued regulations saying exactly what you have to disclose," Polk maintains. Despite the SEC's actions against Chelekis and SGA, other newsletters on the Web often fail to disclose how much they get from companies that they feature on their Web sites.

Legal niceties, of course, are rarely of much concern in the freewheeling atmosphere of the Internet. With scams so rampant, probably the best way investors can use the Internet is to check out ideas obtained through more conventional methods. Mobilia, for instance, became involved with the Internet as an investment tool to obtain info on biotech companies that she learned about through her job. Eventually, she notes, she found herself perusing the AOL message boards--and finding questionable small-cap companies. She became an outspoken presence in some of the message boards. At one point she even got a call from an attorney for one of the companies, a biotech outfit that was widely publicized on the Net. "I found out on the Internet," she recalls, "that he was disbarred in 1992." Still more checking revealed that the company was linked to a network of stock promoters.

Such is the power of the Internet. The fast-money crowd can run up stocks--but they can't hide.By Gary Weiss in New YorkReturn to top


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