On October 23 and 25, 1994, an unidentified subscriber to the Prodigy online service got a little nasty. Actually, more than a little nasty. Actually, a lot nasty. Irresponsibly nasty, one would conclude at first glance.
He or she—the identity of the person is lost to history—posted incendiary remarks in the Money Talk bulletin board, the same online forum in which future paid-research mogul Gayle Essary was exploring the wonders of day trading. The Internet was still in its hobbyist-geek phase, and the action, such as it was, could mainly be found on Prodigy, America Online, and the other large commercial dial-up services, of which Prodigy was the largest back then. A potential audience of two million people could read all the unflattering stuff that somebody unloaded on an obscure brokerage exec named Daniel M. Porush, his employer, a Long Island firm called Stratton Oakmont, and a Stratton IPO in the stock of a company called Solomon-Page Group Ltd. According to this unknown person, the Solomon-Page IPO was a “major criminal fraud,” Porush was a “soon to be proven criminal,” and Stratton was a “cult of brokers who either lie for a living or get fired.”
Now, that was a bit much, even by the insult-happy standards of computer bulletin boards and the Internet, in which one of first terms to be coined, back in the 1980s, was flame, which means “a virulently attacking post.” However, this was a battle that Stratton had to wage. Just a few months before the Prodigy attack, Stratton had successfully beaten back an SEC lawsuit, filed in March 1992, that claimed Stratton used “boiler room tactics” and defrauded the public. Thanks to the SEC, the firm was getting back on its feet. Stratton was desperately battling to keep afloat, and potential customers simply could not be allowed to believe that either the firm or its underwritings were criminal or fraudulent.
While, technically speaking, Stratton had reached a settlement with the agency, in reality it was a Stratton victory—perhaps the biggest to be won against the SEC by an alleged securities transgressor during Artie Levitt’s tenure (and you can be sure he didn’t boast about it in his memoirs). Stratton’s lawyer, a media-savvy ex-SEC regional administrator named Ira Lee Sorkin, had run rings around his former employers, portraying the firm as misunderstood, maybe slightly aggressive, but not at all criminal or fraudulent. It worked. Even though its entire management team received suspensions or expulsions, the firm itself could stay in business, with an “independent consultant” reviewing its “policies, practices and procedures.”
The consultant “will help make Stratton even more compliant than it already is,” Sorkin told the New York Times. Porush received a one-year suspension and paid a $100,000 penalty, without admitting or denying anything, as the firm continued fighting hard, issuing press releases and protesting its innocence. “Stratton Oakmont remains a fully operational, well-capitalized broker-dealer and looks forward to continuing to serve fully its clients. The firm’s underwriting and brokerage activities will continue without interruption,” Stratton said in a press release announcing the settlement.
So when those nasty words appeared on Prodigy in October 1994, Porush had to do what motivational speakers call “acting as if.” He had to act as if he wasn’t a criminal, and as if the SEC hadn’t given a mammoth boiler-room operation a lease on life to continue to rip off the public.
It was a stunningly successful strategy. In the months to come, dispatches from Stratton’s righteously indignant defense of its reputation interspersed with news about the SEC’s continued tussling with Stratton. News of the lawsuit continued, muddying the waters, even after Stratton openly defied the consultant report (“impractical and irresponsible,” fumed Sorkin), drawing yet another lawsuit from the SEC. In July 1995, Porush, still “acting as if,” invited in Newsday to complain about “the lies and smears that newspapers keep printing every time the Securities and Exchange Commission sues his firm…[and] every time a fed-up investor vents his spleen in an online bulletin board.”
It was more than just good PR.
The difficulty with writings such as those that appeared on Prodigy was fundamental to the character of Wall Street, in which fortunes rise and fall on the basis of imagery, and in which imagery is fragile and transitory. What you or I would call free speech is not viewed as a fundamental constitutional right, but rather as a form of bacteria. The bacillus of free speech can be friendly, in the manner of organisms that turn sour milk into cheese, or malevolent. A good example of friendly informational bacteria was the Baloney Blitzkrieg, or the puff pieces on various subjects that you see every day in the financial press.
Friendly informational bacteria serve only one purpose—to promote the intake of United States currency into the object of praise and prevent its outflow. Malevolent informational bacteria have quite the opposite effect. They cause United States currency to remain in the wallet, to not flow out, nourish, and enrich.
Informational bacteria could not be more malevolent than the organisms that were being spread via Prodigy. There was something new here—something troubling and dangerous. Instead of the usual bacillus spreaders of the media, who could often be subdued by a stiffly worded letter, what was happening on Prodigy was potentially far more difficult to handle. Ordinary people, especially anonymous ordinary people, were not vulnerable to the kinds of leverage that work against the press. They were far more prone to multiply. They needed to be crushed.
The quarantine-and-disinfection procedure was effectuated in the New York State Supreme Court in Nassau County. In October 1995, after some legal skirmishing, Prodigy settled. A joint press release soothed Porush’s hurt feelings thusly: “Prodigy is sorry if the offensive statements concerning Stratton and Mr. Porush, which were posted on Prodigy’s Money Talk bulletin board by an unauthorized and unidentified individual, in any way caused injury to their reputation.” Carefully worded, nothing admitted, but it didn’t matter because the word sorry was used, which was enough. Victory.
No money changed hands. No money had to change hands.
The purpose of the lawsuit was not to get money but to prevent the spread of bacteria. Disinfection was the only thing that mattered. Disinfection had taken place. Stratton Oakmont had rebuffed an attack of resistant informational bacteria, and by so doing had established itself as a litigator, a process-generator. Its critics were on notice, and an apology was on record that could be shown to investors in the wares that Stratton was selling.
Stratton continued in business for another two years until it collapsed under the weight of its own criminality, and Porush and his partners were all carted off to federal prison. In 1999, Porush and other Stratton execs pleaded guilty to securities fraud and money laundering for manipulating a bunch of Stratton IPOs, including Solomon-Page Group Ltd. Stratton really was a den of thieves. Porush really was a criminal. The Solomon-Page IPO really was rigged. If prospective Stratton customers had listened to the anonymous person on Prodigy, they would have avoided millions of dollars in ripoffs.
Looking back, you really have to admire Porush v. Prodigy as a marvelous bit of hypocritical asymmetry. Remember that, as Taglich Brothers, young David Wolfson, and countless brokerage firms and hedge funds and mutual funds and other Wall Streeters have learned, breaking a few house rules on Wall Street—or even some fairly significant laws—does not mean having to say you’re sorry. Still, here it was, an apology to Stratton Oakmont and to Daniel Porush, the kind of man who never had to say he was sorry—except when prodded to do so by his attorneys, just before a federal judge sentenced him to four years in prison and seven years of supervised release, on ten counts of securities fraud and money laundering. *
The truth was out about Prodigy a full two years before Stratton was belatedly shuttered by the NASD, five years before the massive Stratton indictments, and seven years before Porush pleaded guilty. Only one reporter followed up on the Prodigy whistle-blower’s allegations—Susan Antilla of the New York Times, who wrote two pieces about the Solomon-Page IPO. There was no other follow-up. Defamation suits will do that—they have a chilling effect.
In fact, the only legal ruling that emerged from the case was bad for online-service providers, because it found them potentially capable of being held liable as publishers of the nasty stuff that people sometimes said in online comments. In 1996, with the enactment of the Communications Decency Act, Congress closed this legal chink in the armor of the ISPs, but the point was proven. You had to watch your step online—or be sued.
Porush v. Prodigy was a losing battle, as battles such as this usually are. Still, it was more than a demonstration of raw hypocrisy on the part of a criminal and typically abysmal negligence on the part of Artie Levitt’s SEC, which let Stratton off the hook to rampage through the markets for another two years. It was also the earliest demonstration of the power that investors can wield by simply telling the truth.
For the first time in history, investors were capable of functioning as a kind of third force—spreading malevolent informational bacteria on their own, without first gaining the confidence of a member of the media.
They could even do their bacillus-spreading anonymously.
Anonymity makes a lot of people recoil, and for good reason. Anonymous information is inherently unreliable. Anonymous opinions are inherently suspect. But anonymous tips, fleshed out and verified, are the meat and potatoes of cops, investigators, and reporters. Anonymity—to borrow an expression from an insincerely contrite Dan Porush—levels the playing field when you are writing about people who are rich with stolen money and not above using their swag to hire lawyers to shut you up.
In 1994, with the Internet in its infancy, weblogs didn’t exist and Internet message boards were only just cranking up. By the end of the 1990s, the Internet was providing investors with ways of counteracting Wall Street hype, often behind a protective shield of anonymity, ferreting out criminals and connecting with other investors.
That brings us to the next recorded outbreak of malevolent informational bacteria. Despite myriad disinfection attempts, this particular scourge was never totally eradicated. It is still going on—arguably the longest epidemic of its kind in history—and it provides an ongoing lesson in investor power. It shows that the tools are there. All you have to do is use them. And all that the people with the power—the regulators and the media—have to do is to pay attention.
The story of this outbreak of malevolent informational bacteria begins in 1998. At that time, in Australia, Norway, Ireland, and elsewhere in Europe, people were getting calls from a new arrival on the transnational cold-calling scene. Its name was Amber Securities. One of the people at the receiving end of the calls was an Australian named Scott Bowen. The stock that Amber tried to sell Bowen was a scrappy little motorcycle company called Titan Motorcycles of America. That’s one of the companies that was mentioned in our earlier exploration of the overseas boiler rooms, one of the stocks whose virtuosity was by now familiar to a great many people with working telephones in the lush green west of Ireland.
Bowen did not buy any stock in Titan when it was first pitched to him. But in June 1999 he took the plunge with another stock from the U.S. OTC market, a California company called ZiaSun Technologies. As Bowen later told the tale, he purchased a thousand shares of ZiaSun from Amber, which by now had changed its name to the more businesslike Capital Assets Ltd. ZiaSun had its finger in several pies, most very promising and Internet-related. In the ensuing months, Bowen claimed, he was persuaded to buy more promising-looking stocks—Chequemate International Inc., Loraca International, CastPro Inc., and a company partly owned by ZiaSun called Asia4Sale. Like ZiaSun, all had been doing quite well in the market. ZiaSun shares, for example, had quadrupled in less than a year to more than twenty dollars by mid-1999.
Then came the microcap crash, the one that got the naked-short Baloney Blitzkrieg all revved up. Among the casualties was ZiaSun, which was down to six dollars a year later.
Bowen was upset. As upset people often do in such situations, he sued pretty much everyone he thought was culpable, including ZiaSun. According to his allegations in his suit against ZiaSun and other defendants (all of whom hotly denied wrongdoing), the impetus for the stock-price rise was, he contended, a “pyramid scheme” in which stocks were pushed on Bowen and other shareholders throughout the world.
Bowen maintained that the impetus for his stock purchases came from a “financial and investment consultant” for Amber/Capital named Lynn Briggs. The Australian contended that Briggs told him that no investor had ever lost money with those companies because of Amber/Capital’s “close association and intimate knowledge” of the companies. Bowen also alleged in the suit that another individual with a starring role in this little drama, who “directed” Briggs and other brokers who peddled the stocks, was a person named Bryant Cragun. He was a former ZiaSun CEO who lived in California and had become an investment advisor and fund-raiser for all the companies sold to Bowen, ZiaSun included. All told, Bowen bought exactly $365,625.50 in stocks, according to his suit.
It was a pretty routine Wall Street tale. Man buys stock, man loses money, man doesn’t get his money back. Ordinarily it would end at about this point, usually with the suit tossed out of court—as indeed happened to Bowen’s suit against ZiaSun et al. Bowen simply didn’t have enough evidence to support his pyramid-scheme allegation and to connect all the dots, so a judge eighty-sixed the suit. But the story did not end there. The war that Bowen lost continued on the Internet, and was still being slugged out years later.
Like most companies peddled by overseas boiler rooms, ZiaSun was perfectly legitimate. It had real operations, real earnings, and actual people working for it. However, the company’s founders had ties to the boiler rooms, and the company had business dealings with several of them. They were the kinds of ties that, if they had been highlighted and brought to the attention of people like Bowen, would probably have resulted in people like Bowen not buying the stock. The problem from the investor standpoint was that nobody was writing about ZiaSun, not bringing those interesting connections to the attention of the investing public.
Nobody was writing about them except people like you.
Unbeknownst to Bowen, a lot of people were speaking out about ZiaSun. They weren’t the big-mouth pension fund managers whose self-righteous and often hypocritical squawking helped bring down Dick Grasso. No, they were what the self-regulatory pyramid and media condescend to call “small investors.” In late 1998, months before Bowen and other overseas investors were being pushed the stock of ZiaSun, a discussion about the company commenced on the Internet. The chatter on the popular, cacophonous Silicon Investor Web site began on November 5, 1998, when a fellow who bought ZiaSun shares (from a broker who also sold him stock in a scrappy little motorcycle company; see if you can guess its name: it begins with a “T”) created a message-board topic on the company.
At first all was harmonious and innocuous. That changed in the spring of 1999.
The first bouts of nastiness were little more than the online equivalent of mosquito bites. Some were flames, very much of the kind that got Dan Porush all riled up in righteous anger.
“Personally I think this company is a SCAM!” said one anonymous critic on the SI board.
Soon the attacks became more specific, more barbed, more effective. The SCAM! ranter later explained in another post that he “called investor relations one morning last week and had six different people return [his] call telling [him] how great the company was.” Another anonymous message observed similarities between ZiaSun and another Internet play that had been widely criticized on SI. It also detailed apparent links and similarities between the companies. Several other messages linked ZiaSun to Amber Securities, and implied that neither was a paragon of virtue. Another alleged that ZiaSun had been promoting its products in Internet newsgroups, via mass-volume spam postings.
While all this was happening in early 1999, the people whose job it was to protect investors from boiler rooms were nowhere in sight. Back in 1999, the total amount of energy expended in the United States—or the rest of the world, for that matter—on overseas boiler rooms was a big, fat zero. Nobody who was supposed to ferret out such things, not the self-regulatory pyramid or law enforcement or the media, had said even one negative word about any of the people who sold Bowen those $365,000 in stocks. The self-regulatory pyramid, after years of consent decrees and knuckle-raps of the kind Stratton had received, was only just getting serious about allegations of fraud from U.S. investors. The global victims would have to wait, maybe forever.
This was a vacuum, the kind of vacuum that had arisen so often in the past when the stock pushers peddle their wares, but for the first time in history it was being filled. It was being attacked with informational bacteria—the malevolent kind. The kind that keeps investors from plunking down their cash. Fully two months before Bowen bought ZiaSun and other stocks from the renamed Amber Securities, the alarm was already being sounded, if you knew where to hear it. The bell ringers weren’t Artie Levitt’s SEC and not myself or anyone else in the media at the time. People were doing more than yelling. They were using powerful Internet search tools to investigate—sometimes going down blind alleys but sometimes hitting nails on the head.
Something changed. It wasn’t just flaming anymore. When ZiaSun boosters—including ZiaSun employees and a stock promoter from the Cayman Islands—talked up the company in Silicon Investor and other investor message-board Web sites, they were answered by more than just jibes. The responses were often articulate and well reasoned.
The SI people combed through the growing Internet availability of public records and address information—once the exclusive province of regulators and federal agents, investigative reporters and private detectives. They disclosed their findings to denigrate ZiaSun’s prospects and repeatedly hammer away at Amber Securities, other reputed boiler rooms, and the people connected to them. The list of targets eventually grew to encompass Bryant Cragun and Lynn Briggs, who Scott Bowen in Australia had unsuccessfully sought to blame for his stock purchases.
Following SI’s ZiaSun message board was a bit like watching a constantly evolving argument among a group of petulant, sometimes threatening busybodies and lunatics. Through it all, actual information was being exchanged, and some of it was pretty good.
On April 8, 1999, one message on the SI board zeroed in on ZiaSun’s investor-relations firm, which did work for a bunch of boiler-room favorites (including a spunky little motorcycle company), and had the same address as ZiaSun. That’s hardly the kind of thing you want to see in an OTC stock, if you are a small investor. Others noted that Amber was selling stocks in Australia without being registered with Australian authorities. In the coming months, other messages would say that Lynn Briggs, former president of ZiaSun, had once been a broker for P.T. Dolok Permai, and that P.T. Dolok was also known as International Asset Management. When action was finally taken overseas, they would spread the word that IAM had been raided by Thai authorities and that both firms had been blacklisted by Australian and New Zealand regulators for selling securities without a license.
The SI crowd would call attention to documents indicating that IAM had raised funds for an “IPO” for ZiaSun when it had the name of Best Way USA, and was distributing an “IPO prospectus”—the problem being that Best Way USA never actually had an IPO. * The SI messages also traced the colorful history of Bryant Cragun, who was chairman of an offshore stock pusher called Oxford International Management from 1991 to 1997, and who was later linked in court documents to IAM and P.T. Dolok Permai as well. Along the way, they uncovered in an Internet archive a May 1998 Web page for IAM, which included a roster of IAM brokers. It’s there where one can find EdwardJ. Loessi, future CEO Council founding member, whose surprised reaction to appearing on said roster I noted on page 41.
The people who should take a bow for digging out all this stuff, giving these goodies and a lot more to the media and also to the regulators when they finally woke up to the problem, were condemned by ZiaSun and its defenders as short-sellers eager to attack the stock. That has an element of truth to it, as at least one professional trader was involved in the SI online debate. And it may well be that some of the anti-ZiaSun zealousness was brought on by a thirst for short-side profits. But even if it were 100 percent true, that would probably be one of the best arguments in favor of short-selling of microcap and OTC Bulletin Board stocks. Anything that serves as a counterweight to all the rampant hype and manipulation, anything that will induce investors to publicize the shortcomings of questionable stocks, should be welcomed and encouraged. But as we have seen, the SEC made it harder to short small-company stocks—thereby discouraging shorts from participating in the online dialogue about microcap stocks.
Now that the shorts have absconded from microcaps, thanks to the geniuses at the SEC, the gumshoes who have been tracking down the offshore boiler rooms and their ilk—and are continuing to work hard to uncover rotten companies—are strictly amateurs. They are ordinary citizens of this country—and sometimes not even of this country—who are filling in where law enforcement has been slow to tread.
These people come from all walks of life and various points on the globe, but they have two things in common. One is that they are fed up. Another is that they have a panache that is very deeply ingrained in the American spirit. Calling what they do “vigilantism” is not quite precise, and neither is it 100 percent correct to say that the SEC and other regulators are playing the Dean Jagger role in Bad Day at Black Rock, the sheriff with a guilty conscience and a bottle of gin. But it’s close. The difference is that old-style vigilantism was violent, illegal. Not the Internet vigilantes. However, the reaction has been violent—not physically, but by use of the modern-day equivalent of the gunfight at high noon.