Ashton Technology Group (fka ASTN)

[marty_lewis]

Hi sarals here's the article:

http://www.redherring.com/index.asp?layout=story&channel=20000002&doc_id=1270019527&rh_s...


Investor rage gets ugly
By Dan Briody and Stephen Lucey
Red Herring
June 7, 2001


By Salomon Smith Barney's estimates, between January 14, 2000, and March 22, 2001, about $4.7 trillion's worth of wealth simply vanished from United States stock exchanges. Sure, it was smoke and mirrors that created that Internet bubble of wealth to begin with. We all know that. But now, investors are taking a closer look at how some companies touted their stocks during the boom. And they are pissed.

Death threats have arrived at the doorsteps of some Wall Street analysts and CEOs. Class-action lawsuits are gobbling up the time and precious cash of technology companies, who are turning out to be the prime targets of late: more than half of investors' lawsuits targeted technology companies in 2000, up from 35 percent in the 1990s. Meanwhile, investment banks are under fire from regulatory bodies for allegedly rigging the IPO process during the height of the Internet craze. No one is beyond suspicion; everyone is on edge.

"My kids' ages are off limits, because of security. We get death threats at work from dissatisfied shareholders," says Matthew Szulik, CEO of Red Hat (Nasdaq: RHAT), whose stock plummeted from a high of $143 in December 1999 to a low of $5 a year later, erasing $23 billion worth of market capitalization. "People bought in when the stock was hot and the movement was hot," Mr. Szulik groans, "and now they're pissed."

In retrospect, the angry -- and often unstable -- reaction of investors isn't all that surprising. Between 1989 and 1999, about 26.4 million brand new investors jumped into the stock market, increasing the total number of investors by 50 percent, according to the Securities Industry Association, a trade group for securities firms. These newcomers treated the Nasdaq like it was Las Vegas -- but for a while, it looked like technology investing had much better odds.

People traded on whims, gut feelings, and often with no more knowledge than a company's ticker symbol. So imagine the surprise of these novices when the stock market -- which had done nothing but go up since they signed on -- suddenly expected them to share the burden of $4.7 trillion in losses.

Mr. Szulik is still hearing about the pain. "For whatever reason, somehow people have built a relationship with this company -- people who have no technical background have a feeling or an opinion about Red Hat," he says. Red Hat attracted an enormous amount of inexperienced local investors in its home state of North Carolina. "When the stock didn't do what they expected, they resent that."

LOOKING FOR A SCAPEGOAT
Actually, some investors do a lot more than resent. In worst-case scenarios before the recent boom, investor rage resulted in homicide, as in the case of Mark Barton, the Atlanta day trader who shot and killed nine fellow traders in 1999. Although such murders are extremely rare, investment-related violence is on the rise and causing serious concern on the part of law enforcement officials. "We have seen a significant increase in caseload over the past two years, and the stakes are getting bigger and bigger," says Joe Ford, chief of the Economic Crimes Unit at the FBI. "Microcap, IPOs, bribes, and kickbacks. It's a combination of things. But the Internet provides the forum for it all."

Salomon Smith Barney analyst Jonathan Joseph knows how far desperate investors will go to cast blame anywhere but on themselves. Last July, he was the first sell-side analyst to predict a downturn in the semiconductor cycle, and that contributed to a 20 percent sell-off of the Philadelphia Semiconductor Index over the following month. As it turns out, Mr. Joseph was right, but investors didn't care for the news at the time. For his accuracy, Mr. Joseph says he received death threats, a subject that to this day he is uncomfortable discussing.

"There are a lot of investors that might be considered lunatic fringe, but I don't let those people decide what I'm going to do professionally," says a still-agitated Mr. Joseph.

Although seasoned investors may find it difficult to understand such extreme reactions, psychologists say the phenomenon is understandable, considering that many inexperienced investors equated their portfolio performance with their own self-worth. When the markets tanked a year ago, self-worth took a hit on both the figurative and literal levels.

"People have used this bull market as a mirror for their self-esteem," says Dr. Richard Geist, president of the Institute of Psychology and Investing and clinical instructor in the Department of Psychiatry at Harvard Medical School. "It validated their intelligence and their ability to psychologically understand the new economy, and all of a sudden, that has all been taken away." Not to mention the fact that they lost a ton of money in the process.

KINDER, GENTLER REVENGE
For the less feloniously inclined investor, vengeance is also available in the form of one of America's most popular and long-standing traditions: litigation. After all, the easiest way to heal investment wounds and shattered portfolios is with more money.

Of the 43 companies that have had investor suits filed against them this year, 30 of them were technology companies, according to National Economic Research Associates, a White Plains, New York, economic consultancy.

Some of the most respected blue-chip technology companies in the market currently find themselves mired in legal wrangles, alongside iffy startups. Although most blue-chip companies' stocks may not have fallen as far as the startups' stocks, they often fell as fast. And it's fast falls that make a company susceptible to shareholder lawsuits, says David Furbush, a securities litigation partner at Brobeck, Phleger & Harrison in Palo Alto, California, a law firm that is noted for representing plaintiffs in shareholder suits.

So jilted investors are scanning archived footage of CNBC, CNNfn, and Bloomberg TV and poring over old stories from the financial press in the hopes of finding inappropriate and misleading comments from bullish CEOs. Although executives are free to make some forward-looking statements without fear of litigation -- they are protected by the safe-harbor provision in the Private Securities Litigation Reform Act of 1995 -- CEOs often fail to couch their statements with the appropriate cautionary language. These oversights leave them open to lawsuits when reality doesn't mirror executives' predictions.

That is one of the subtleties that may have been missed by Nuance Communications (Nasdaq: NUAN), a Menlo Park, California, designer of speech recognition software. Priced at $17, Nuance's shares nearly doubled the day they hit the IPO market in April 2000, and subsequently soared to a high of $182 in late summer. From there they tumbled back to earth, bouncing around between the high $20s and the high $40s in January 2001. Then, on January 31, Nuance's CEO Ronald Croen appeared on CNBC's Squawk Box and talked about profits and expenses.

Although Mr. Croen said that he didn't expect Nuance to post a profitable quarter until the end of this year or early next year, he also said, in a response to a question about costs, that Nuance was growing its revenues "rapidly" and "controlling expenses so that the net continues to improve," according to transcripts of the interview. But six weeks later, on March 16, Nuance warned that it expected to report slowing revenue and a greater-than-expected first-quarter loss. Its stock dropped 43 percent, to under $10; it now trades at $17.22.

Moreover, five weeks before the earnings announcement, between February 2 and February 13, Nuance insiders sold a total of 407,000 shares for proceeds in excess of $15 million, Securities and Exchange Commission filings show. That includes 233,700 shares that Mr. Croen sold for $8.6 million. Investors have sued Nuance in the U.S. District Court of Northern California, alleging that Nuance management knowingly sold stock during the "class period," or lockup time, in anticipation of poor earnings later that month. They are seeking an unspecified amount in damages. Nuance did not return repeated phone calls and emails seeking comment.

WHO CAN SPARE $12.3 MILLION?
On the bright side for companies being sued, 81 percent of the lawsuits are settled and almost all of the rest are dismissed, according to National Economic Research Associates, which compiled data on 1,763 shareholder lawsuits filed between June of 1991 and June of 2000. Settlements averaged $12.3 million over the last five years, which is usually no more than 10 percent of investors' claimed losses.

Only 1 percent, or 24, of the cases resulted in judgments made in court; of those, the plaintiffs won 15. NERA said it does not have data on the amount of those judgments. But they can be startlingly expensive. In 1991, in one of the most high-profile investor cases to ever make it to trial, a jury decided against Apple Computer (Nasdaq: AAPL) executives and awarded investors $2.90 a share -- about $100 million -- for the executives' allegedly misleading statements about a faulty Apple disk drive, known as "Twiggy." Though the case was eventually settled for $20 million in an appellate court, the decision at the time sent waves of fear through Silicon Valley.

Even when settlements and judgments are small, they still require real money. And while $12.3 million may be chump change for a blue-chip defendant, it can be a significant hit on smaller companies' bottom lines and resources, since many cases drag on for years.

Insurance costs are going up, too. According to Paul Ferrillo, associate general counsel at National Union and Fire Insurance, the largest domestic subsidiary of insurance giant AIG, insurance rates have increased 15 percent since June 2000 as the likelihood of suits continues to balloon. As a result, companies going public today are getting five times the level of insurance coverage they would have just a few years ago. And insurers are starting to push companies to stop acquiescing to plaintiff demands.

"Right now, the historical pattern of cases being settled is being broken," says Michael Young, a litigation partner at Willkie Farr & Gallagher in New York, which specializes in corporate litigation for so-called "new economy" clients. "Companies are increasingly saying: 'We're not going to roll over anymore. This is coming close to extortion and we're simply not going to put up with it.'"

ONE MAD PEDIATRICIAN
Vengeance-seeking investors are being very thorough in their quest to punish all those potentially responsible for their losses, and the new popular targets for investor rage are Wall Street analysts. Experienced traders have long reviled sell-side analysts, whose stock ratings often seem to reflect nothing more than their firms' desires to underwrite a company's next public offering.

But green investors who took the ratings to heart are now intent on holding these overzealous sell-siders personally responsible for their losses, and it's easy to see why. Even while the Nasdaq lost 60 percent of its value in 12 months, analysts remained decidedly upbeat on the market. Of the more than 28,000 securities covered by investment banks, less than one-tenth of 1 percent (.07 percent) currently carry a Sell rating, according to First Call.

Public enemy No. 1 in the analyst community this year is Merrill Lynch's bullish Internet golden boy, Henry Blodget. After failing to downgrade any of the stocks that he covered until after they had lost an average of 63 percent of their value, Mr. Blodget became a popular target of venomous attacks on countless stock message boards. It was Mr. Blodget's refusal to downgrade InfoSpace (Nasdaq: INSP) -- a wireless portal company based in Bellevue, Washington -- even as the stock plummeted 91 percent last year, that Debases Kanjilal, a 46-year-old pediatrician in New York, blames for his losses of $518,000. Now Mr. Kanjilal is intent on holding Mr. Blodget personally responsible for his loss; he filed an arbitration suit against him in March with the New York Stock Exchange.

"Henry Blodget is the poster boy of conflicted analysts who reaped huge investment banking and brokerage fees by pumping up the tech bubble and then leaving the investing public holding the bag," says Jacob Zamansky, Mr. Kanjilal's attorney in the case. "Blodget and other analysts must be held personally accountable."

In his suit, Mr. Kanjilal claims that Mr. Blodget remained overly positive on InfoSpace because Merrill Lynch was acting as a financial advisor in InfoSpace's acquisition of Go2Net, a Web portal company in Seattle, Washington. Mr. Kanjilal is seeking $10 million in punitive damages and $800,000 in compensatory damages.

Merrill Lynch disputes Mr. Kanjilal's allegations. "Our analyst research was not compromised," says Joe Cohen, a Merrill Lynch spokesman. "Stock recommendations are just that: recommendations. This was an experienced investor who ignored our advice and followed a very aggressive, risky strategy," Mr. Cohen says of Mr. Kanjilal. A hearing date for the arbitration case has been set for February 2002.

RAGE MANAGEMENT
The irony, of course, is that investors have not directed their rage at the one place it could really make a difference: themselves. After all, the SEC can only try to protect investors against fraud and market manipulation, not uninformed investment decisions.

For now, many of the burned investors have retreated. "I think many will probably permanently stay out of the market, because they now recognize that short-term strategies are not the way to success," says Ned Riley, chief investment strategist at State Street Bank in Boston. Others, he says, "will lick their wounds and put money aside to invest more responsibly in the future."

It is still unclear what effect, if any, recent laws like the SEC's fair disclosure law, otherwise known as Regulation FD, will have on the market. The law is supposed to level the playing field for investors of all sizes by requiring companies to disclose all material information publicly. And indeed, more information is flowing. According to First Call, companies issued three times the amount of earnings pre-announcements in the first quarter of 2001 than they did during the same quarter last year. But how wisely investors will use the information is another matter.


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