|Bad boy Steve Harmon.|
...Harmon may not have been so independent after all. He solicited money for his $50 million venture fund--and for his company--from Silicon Valley chief executives while talking up their stocks.
...former Zero Gravity execs say Harmon ran up against the company's compliance rules in picking stocks. "The guy was clearly in the gray area, and probably in the black, when it came to compliance issues," says a former Zero Gravity executive.
Zero Gravity's Steve Harmon: Fallen Back to Earth
The inside story of how a Net guru stumbled
It was early 2000, and Steve Harmon was riding the crest of the Internet wave. Harmon, 35, a self-proclaimed stock guru who wanted to become the "Warren Buffett of the Internet," began covering the Internet in 1994. Holding himself out to be "the world's leading independent Internet analyst," the goateed fast-talker had a weekly gig on CNBC and was featured in The Wall Street Journal and Smart Money profiles. He was named an "Internet visionary" by Worth Magazine and voted a top Internet analyst by CBS MarketWatch. BusinessWeek called him a "respected Internet analyst." His stock picks were considered oracular by investors, especially daytraders, who often frenetically bid them up.
Then came the March, 2000, Nasdaq crash--and Harmon's career jolted into reverse. It wasn't just because of dot.com stock picks that went awry. An investigation by BusinessWeek reveals that Harmon may not have been so independent after all. He solicited money for his $50 million venture fund--and for his company--from Silicon Valley chief executives while talking up their stocks. And his recommendations included a company in which the Silicon Valley venture capital firm, Hummer Winblad Venture Partners was the largest outside shareholder. Hummer Winblad was also the primary backer of Harmon's mutual fund and venture capital company, now called Zero Gravity Internet Group, which he started in November, 1999.
Sure, investors and regulators are in a furor over analysts from established Wall Street firms, such as Mary Meeker and Henry Blodgett, who often appear to be rife with potential conflicts of interest because of their firms' underwriting. But it turns out that analysts like Harmon, who trumpet their independence, can also have potential conflicts. And advice Harmon gave to "Joe and Jane Bunnyslippers"--how he referred to average investors around colleagues--was brought into question. Harmon repeatedly declined to comment on the record for this article.
NO DIPLOMA. Harmon's reputation extended far beyond stock players. He hobnobbed with Silicon Valley's elite. Famed venture capitalist John Doerr wrote the foreword to Harmon's widely read 1999 book on raising venture capital, Zero Gravity. Marc L. Andreessen, co-founder of Netscape Communications Corp., also endorsed the book and kicked in money for Harmon's venture fund. On his Web site, Harmon referred to Yahoo! Inc.'s Jerry Yang as a "friend and personal colleague." But Harmon's biggest supporter was John Hummer, founding partner of Hummer Winblad. Hummer, 53, a 6-foot-10-inch former basketball player with the Seattle Supersonics, declined to comment on the record for this story because of a lawsuit involving his firm.
Harmon's career really began to unravel last July, when he was removed from his CEO spot by the company's board because of his incompetence as a manager, according to a Zero Gravity memo. He was later fired altogether, in part because it was discovered he had falsely stated--on a Securities & Exchange Commission application to become a registered investment adviser-- that he had a college diploma. (He left California Polytech State University in 1991, just shy of obtaining a journalism degree. After leaving Zero Gravity, he completed it.) In addition, former Zero Gravity execs say Harmon ran up against the company's compliance rules in picking stocks. "The guy was clearly in the gray area, and probably in the black, when it came to compliance issues," says a former Zero Gravity executive.
"BRILLIANT." As an analyst at small investment research firms Paul Kagan Associates, Jupiter Communications, and Internet.com, Harmon was one of the first cheerleaders for companies such as Yahoo and Amazon--and that made his reputation. Says Garnett L. Keith Jr., a former outside director of Zero Gravity and former chief investment officer of Prudential Insurance Co.: "Steve was a brilliant visionary, but he kept losing sight of the demanding rules that apply to the public communication of stocks while running a fund company."
The potential for conflicts speaks for itself. Harmon featured Net Perceptions Inc., an Internet stock, on his popular "Top 10 for 2000" stock list. By Jan. 11, 2000, seven trading days after the list was released, the stock was up 100% from a week and a half before, closing at its all-time high of $60.37 a share. There was just one problem: Hummer Winblad was the largest outside shareholder in Net Perceptions, owning 18.6% of the company, according to registration documents filed with the SEC in April, 1999. Ann Winblad, Hummer Winblad's founding partner, was a director.
Three weeks before Harmon recommended the stock, he sent a detailed letter to Hummer, obtained by BusinessWeek, asking for a list of favors. One request: bringing in a total of $30 million for Harmon's venture fund from Dell Computer Corp. and Microsoft Corp.--William H. Gates III is a Hummer Winblad limited partner and Michael S. Dell was at the time.
He also asked Hummer to persuade David S. Pottruck, co-CEO at Charles Schwab & Co. and also a Hummer Winblad limited partner, to include Harmon's mutual fund in the universe of funds Schwab markets to clients. Schwab eventually decided to include the $5 million mutual fund, which was shut down this past March. A Schwab spokesman says: "We have a standard set of procedures for featuring funds in our Mutual Fund Marketplace." There is no evidence that Hummer got in touch with Pottruck on Harmon's behalf. And a source says Gates and Dell were never contacted. Net Perceptions now trades at around $1.80 a share. "This is a textbook illustration of the kind of conflicts of interest that have begun to undermine perceived integrity and independence of securities analysts," says John C. Coffee, Jr., securities law professor at Columbia University Law School.
Harmon approached other CEOs more directly. Since the beginning of 2000, Harmon had tried to meet with Naveen Jain, CEO of InfoSpace Inc., an Internet company. His goal, stated in e-mail to Jain: to get Jain to invest in Harmon's venture fund or put up money for the company's second round of financing. But Jain was not responding to Harmon, according to sources. On June 16, 2000, in an interview on CNBC.com, where he wrote a weekly column, Harmon talked up InfoSpace, saying, among other things, that "the business model is a great one" and that the company had done an "outstanding job." During the week of his CNBC.com plug, e-mail shows that Harmon was stepping up attempts to get financing from InfoSpace. Former Zero Gravity officials say that Jain finally agreed to meet with Harmon, but the compliance officer put a stop to it. Jain declined comment. Coffee says Harmon's actions may not have been illegal, but "it's still a clear conflict."
Harmon hit up other chieftains for funding. And the stocks of at least four--CMGI's David Wetherell, Yahoo's Jerry Yang, Go2Net's Russell Horowitz, and Xoom.com's Christopher Kitze--had been included in Harmon's "10 for 1999" stock picks. "Steve didn't hesitate in reminding these guys when he was soliciting funding that he had done a good turn for them," says James Hartmann, Zero Gravity's ex-CEO. Horowitz and Kitze both invested in Zero Gravity's first round of financing. Horowitz and Kitze could not be reached for comment.
CNBC execs were becoming concerned about Harmon. In June, 2000, Larry Landau, CNBC.com's former vice-president for business development, says that in a phone call to Harmon, he expressed concern that Harmon was no longer an independent Internet analyst--that he was a money manager running both a mutual fund and a venture fund. In August, CNBC TV and CNBC.com sent Harmon a letter officially terminating his contract as of October, the earliest they could legally do so. Landau says the decision was due to Harmon's "wearing too many hats," resulting in "poor quality of analysis."
DOUBTS ON RETURNS. Harmon had other problems. At the beginning of 2000, Internet message boards were buzzing, questioning the returns on Harmon's "10 for 1999" stock picks. He proclaimed that those stocks netted a 355% total return. Alan Meckler, Harmon's boss at the time and his newsletter publisher says: "Steve changed the stocks 20% to 30% every month. We would have had to hire a full-time statistician to get the actual results." Meckler, chairman and CEO of INT Media Group Inc., says that because of the ambiguity and controversy surrounding it, his company decided to discontinue selling the newsletter. A former e-harmon.com executive who worked closely with Harmon for a few months on setting up the mutual fund says Harmon did not even appear to have a financial information database on the companies he was covering: "His primary resource was Yahoo Finance," he says.
Despite the fallout with CNBC, former Zero Gravity executives say Hummer did not seem to pay much attention to Harmon. "John simply wouldn't supervise any of Steve's activities. He would show up at board meetings, drink his Evian, and name-drop with Steve--that was about it," says Hartmann, who became CEO of Zero Gravity last July. Others say Hummer was too busy to be aware of Harmon's activities and the daily rumblings at Zero Gravity. "John was running a very large fund at Hummer Winblad. His radar simply wasn't tuned to this," says Garnett Keith.
SABOTAGE? Six weeks ago, Zero Gravity sued John Hummer along with his partnership, charging that because Hummer was incensed by the firing of Harmon without his knowledge or consent, he tried to undermine the company. Hummer's response to that lawsuit has sent Zero Gravity into a frenzy. On June 11, Hummer seized control of Zero Gravity by converting his venture fund's preferred stock into common shares. He also issued a statement that he was bringing Harmon back to have "active involvement" in the venture fund. All five of Zero Gravity's employees resigned the next day, including CEO Hartmann.
The Zero Gravity fiasco is just the latest headache for Hummer and Ann Winblad (a former girlfriend of Bill Gates). Hummer Winblad was riding high until the Internet bust. But since then, a number of its venture portfolio companies, including Pets.com, Rival Networks, eHow Inc., and Homes.com, have shut down or filed for bankruptcy.
After Harmon was fired from Zero Gravity last October, he started an Internet consulting company, High Velocity, which, according to former colleagues, is struggling--like most other Net consulting firms. He is an analyst/commentator for ON24, a Webcaster that issues reports on various stocks. Harmon also writes a column for the stocks Web site Siliconinvestor.com.
Although he doesn't seem to be hanging out with the high-tech elite these days, at least Harmon is keeping good company in cyberspace. On High Velocity's Web site, where he is hawking a broadband newsletter for $129 a year, a Steve Harmon quote ("It's time to build profits, focus on fundamentals") appears right beside quotes from Albert Einstein, Frank Lloyd Wright, and Kahlil Gibran. "This is a story about hubris. Steve was one of the true original thinkers--it's unfortunate that he let it all go to his head," says Meckler.