|San Jose Mercury News, Calif., Stocks.comment Column|
After the Internet bubble popped, you'd think that wild speculation would have cooled. You'd think that investors trading on rumors had somehow learned a lesson. You'd think that the battlefield of active trading had adopted rationality and caution as its new passwords.
Well, think again. Welcome to the mini-bubble caused by the anthrax scare. Even as the government copes with hot spots in Washington, D.C., investors are trying to cash in. And some of them have touched off land mines.
Consider the strange story of ESafetyworld (SFTY), a company registered in Nevada but now doing business out of Bohemia, N.Y. ESafetyworld, which says it produces industrial-safety gear, recently set the Nasdaq market on its ear with an announcement directed at our deepest fears.
In a press release that was picked up Friday by Briefing.com -- one of CNBC's main sources of information -- ESafetyworld announced that it had invented a new "containment chamber" that would allow someone to safely open potentially anthrax-tainted mail.
From the picture on the company's Web site ( www.esafetyworld.com), the new invention, called "MailSafe," looks like an eighth-grade wood-shop project: a box with two holes on the side. By placing your hands into rubber gloves in each hole, you can open the letter, much like a nurse might change a baby in an incubator.
Now common sense might raise alarms here. First, you might ask how you put the mail in the containment box. A postal worker will tell you that sorting and handling is as dangerous as opening. Second, it's not clear that ESafetyworld has a product anywhere close to the market. The press release had no price and no schedule.
Finally, there are questions about the staying power of ESafetyworld itself. The last quarterly report it filed with the SEC was for the period ending March 31. And until Friday, its stock was trading at about 50 cents to 60 cents a share.
None of this mattered to the market. As soon as its press release hit the wires Friday morning, SFTY soared. It reached nearly $4 a share before finishing the day at $3.18. More than 6 million shares traded -- double the number of shares outstanding -- meaning the stock turned over several times.
Finally, on Monday, Nasdaq halted trading at $2.49 a share, demanding more information. An ESafetyworld investor-relations spokesman, Matt Henderson, told me Wednesday that company officials were making a presentation to Nasdaq. Suffice it to say there's plenty of skepticism here. Nasdaq doesn't do this when Intel or Dell announces a new product.
This little saga provides a couple of insights. First is the gullibility, or assumed gullibility, of the public. The vast majority of day traders who drove up the price of the stock Friday probably didn't care whether ESafetyworld had a product or not. They were simply trying to make a buck by outdancing the investors who followed.
Yet this approach contains enormous perils. If a stock is suddenly worth nearly eight times what it was worth the day before, the risk matches the reward -- as the halt in trading amply showed. To outdance other investors, you need the agility of Rudolf Nureyev.
The second lesson lies with how news is produced. One intriguing link in this story is ESafetyworld's public-relations company, Florida-based Madison & Wall, which tries to raise the profile of struggling companies by cultivating the media and sending out "blast" e-mails to financial professionals.
It's hard to know precisely what Madison & Wall did for ESafetyworld. I couldn't get Madison & Wall's chief, Dodi Handy, to call me back. But just like some of its clients, Madison & Wall has an interesting history. Once called Continental Capital & Equity, the firm was founded by John R. Manion, 53, who has had a series of run-ins with securities regulators.
Though the company since has been bought out by employees who say that Manion's problems have no relation with the firm, a close look at developments this year suggests that investors might pause before buying the stock of Madison & Wall's clients.
Two weeks ago, Nasdaq stopped the trading in one of those companies, GenesisIntermedia (GENI) as the Securities and Exchange Commission began probing dealing in its shares by Saudi arms dealer Adnan Khashoggi. Another Madison & Wall client, Ursus Telecom (UTCC), filed for bankruptcy protection in April. That came a little more than a month after a former Ursus official filed to sell 200,000 shares while the stock enjoyed a brief rebound during a Madison & Wall-sponsored product campaign.
Like I say, what happened with ESafetyworld's new product is shrouded in mystery. The company has announced that none of its officers or directors profited from last week's boom. But you can't help but think that news has become a commodity like anything else in the age of the Web, capable of being manipulated in the same way as the iron content in nails.
For that, we have mostly ourselves to blame. The lessons of the Internet debacle didn't stick. In our ignorance and our greed, we've given new birth to a variety of hucksterism that would have made P.T. Barnum proud.
-- Scott Herhold's Stocks.comment appears every Monday and Thursday. Write him at the San Jose Mercury News, 750 Ridder Park Drive, San Jose, Calif. 95190; e-mail firstname.lastname@example.org; phone (408) 920-5877. To read the columns online, see www.siliconvalley.com/opinion/herhold/
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