SEC'S AGORA-PHOBIA By CHRISTOPHER BYRON
April 21, 2003 --
AN interesting news release crossed my desk the other day. It was from the Securities and Exchange Commission, and it announced that a fraud suit had been filed by the SEC in Maryland against an Internet newsletter publisher named Agora Inc.
The charge: Selling fake inside information, in the form of "reports" Agora offered to its newsletter subscribers at $1,000 per report, netting something in excess of $1 million on one such report alone.
Plenty of people are doubtless going to rail at the SEC's action in this matter as an infringement of free speech and all that sort of thing. And, to be sure, it's never a good idea to look the other way when the government attempts to regulate what the press, all the way down to the most obscure newsletters, can and cannot report.
But this whole business of Internet tout sheets has reached such alarming proportions, with so many stock promoters now using them anonymously and illegally to hype the shares of worthless companies, that something simply had to be done. The SEC action signals a determination to remind the market that, under the law, stock touts and promoters must have a reasonable basis for making their claims.
IT'S about time, too. Thanks to the Internet, the use of fraudulent and deceptive newsletter promotions to pump up worthless stocks has spread like the SARS virus.
In this racket, promoters make outlandish and outrageous claims to give a temporary boost to the price of some trash stock in the pink sheets or on the OTC Bulletin Board. Typically, the insiders dump their shares thereafter, the price collapses, and the poor schnooks who bought into the stock on the hyped claims in the newsletters are left holding the bag.
According to the SEC, Agora Inc. ran a variation on this basic pump-and-dump scheme. As charged in the complaint, the fact that the price of a particular stock may have gotten a boost from Agora's hype was almost a side issue to the newsletter publisher's real objective.
What Agora was really after, according to the SEC, was to peddle ultra-expensive company "reports" to the public by claiming the reports contained secret, inside information about the company and its business prospects. In reality, says the SEC, the information in the reports was little more than "baseless speculation and outright lies" to separate suckers from their money.
To that end, the complaint charges that on May 14, 2002, at least 15 of Agora's newsletters distributed e-mails claiming analysts at an Agora Inc. subsidiary called PirateInvestor.com had developed a top executive source at a New York Stock Exchange-listed company who had provided bombshell information that was going to make the company's stock price double on May 22.
TO learn the name of the company, all a reader had to do was hand over $1,000 for a report containing the details. The report buyers received identified the company as USEC Inc. - a nuclear fuel processing firm that supposedly stood to benefit from an impending deal with Russia. According to the report, authored by one "Jay Daniels," the deal was due to be approved by the Bush and Putin governments and announced on May 22.
What the report did not say was that the name of its analyst-author, "Jay Daniels," was actually just a pseudonym for the editor of the PirateInvestor.com newsletter: Frank Porter Stansberry.
Nor did the report disclose that the so-called top insider executive at USEC was actually just the company's in-house investor relations man, Steven Wingfield - who told the SEC he never made any such statements as Stansberry was attributing to him as USEC's anonymous top insider executive.
In any event, the promotion was sufficiently convincing that, according to the SEC, Agora Inc. sold more than $1 million worth of the reports to more than 1,000 actual buyers.
What's more, trading volume in USEC's shares jumped more than 10-fold in the week that followed the promotional hype of May 14, lifting the price of the stock 27 percent to $9.98 per share.
Not surprisingly, May 22 came and went with no announcement, and the stock began to slide. A month later, in June 2002, a deal with Russia was indeed announced, but the market didn't react one way or another and the stock continued to slide. As of Friday, USEC was selling for $5.40 per share - not much more than half its hyped high of 11 months earlier.
Whether or not the Agora Inc. bunch were intentionally lying in their USEC promotion, there can be no denying that extreme exaggeration and wild-eyed over-statements were plastered all over it and, under the law, that can be just as bad as outright lying. One needs to have a reasonable basis for any prediction about stock price behavior, and when the prediction is for a stock to double in price on a single day, you need to have a lot more than the claim of an anonymous, puffed-up source.
YET preposterously exaggerated claims and predictions are the stock in trade of many stock-tout newsletters, particularly in the penny stock arena, and Agora Inc. is no exception. The SEC complaint points out that Agora Inc. newsletters routinely lure in subscribers by making preposterous promises and predictions. Example: "Almost Unbelievable Profits - 4.5 Times Your Money in 48 Hours."
One of the most colorful promoters in that regard is an Agora Inc. newsletter editor named James Dale Davidson. Though he is mentioned in the SEC action, he is not accused of any wrongdoing and is cited simply as an example of an Agora Inc. promoter with undisclosed ties to the stocks he promotes.
Davidson insisted strenuously last week that any ties he may have to the stocks recommended in his newsletters are all fully and properly disclosed.
BE that as it may, Davidson is no shrinking violet when it comes to bombastic and extreme predictions. In 1991 he and a former editor of the Times of London, Lord William Rees-Mogg, co-wrote "The Great Reckoning," a book in which they predicted financial and political calamity for the entire world in the 1990s.
According to the authors, there would be global Depression accompanied by a collapse in real estate. In Russia, a Slavic dictator would seize power in the face of mass starvation. In the West, the money center banks would collapse, oil prices would plunge to unprecedented lows, and there would be a mass exodus from big urban centers, especially from New York.
Davidson has since turned his talents as a seer to the stock market, where he has been aggressively hyping a biotech stock called GeneMax Corp., which trades on the OTC Bulletin Board.
In the summer of 2002, Davidson declared in one of his newsletter columns that GeneMax possessed a "breathtaking gene therapy" that offers "incredible hope for cancer patients" and an "absolutely stunning" opportunity for investors.
In fact, GeneMax's total gross revenues since its founding in 1999 amount to less than $27,000, and any payoff from its alleged "breathtaking gene therapy" certainly lies years in the future, if at all.
The stock market agrees, and has hammered down GeneMax's price from $5-plus a year ago to a current price of $1.78. Many of Davidson's other predictions, equally strident and self-confident, have proved equally disappointing.
Now the SEC seems ready to join the issue with all these people and their soapboxes head on: Just how loudly can you shout "Buy this stock!" before the regulators cry foul? The SEC's answer: As loud as you want, if you've got a reasonable basis for your claims.
* Please send e-mail to: cbyron@nypost.com
