MARKET ANALYSIS
eConnect looked like it was going to make lots of people rich. The San Pedro, California, company intoned all the magic words: Internet. Wireless. Commerce. Banking. And it had a low share price, roughly $1 as listed on the Over the Counter Bulletin Board (OTCBB), NASD's electronic directory of stocks that aren't traded on regional or national exchanges in the US.
After a few press releases, including one announcing a "unique licensing arrangement with PalmPilot," eConnect stock shot up more than 1,400 percent in a little over a week. But when the SEC, acting on a tip, investigated the company's claims, it found "no licensing arrangement whatsoever." Meanwhile, a Los Angeles tree trimmer named Stephen Sayre was hyping the stock in official-looking analyst recommendations. After he had pocketed $1.4 million, he blew his cover by giving an interview to Business Wire. In late March, the SEC charged both Sayre and eConnect with fraud.
The eConnect debacle wasn't the first scam to arise from the over-the-counter market - Wall Street's equivalent of the Wild West, where the only thing lighter than trading volume is regulation. Yet investors are pouring money into these obscure companies, which are generally too new, too small, or too tight-lipped to qualify for an exchange. According to a report by analyst Greg Smith of investment bank Chase H&Q, the trading volume of stocks listed on the OTCBB has risen nearly fourfold in the past year - twice the rise in Nasdaq trading and eight times last year's increase on the New York Stock Exchange. "It's driven by retail investors," Smith says, "people who are willing to take a flier and risk losing all their money."
But what's driving investors? Blame the Net. Over-the-counter stocks are ignored by the mainstream financial media, yet they're hot topics in chat rooms and on message boards, where rags-to-riches stories proliferate and self-styled analysts tout their favorites. In the absence of other information, just a few kilobytes of ehype can send share prices soaring - a fact not lost on con artists who perpetrate pump-and-dump schemes complete with fake news reports and bogus Web sites bearing respected brand names such as Bloomberg News. Ultimately, the willingness of investors to suspend disbelief is, Smith observes, "a natural extension of the bull market."
- Cory Johnson (cjohnson@thestreet.com)
Over the Counter Bulletin Board: www.otcbb.com.
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