Net Is Forum for Some Risky Stock Promotion

To individual investors, the Internet is nothing short of a godsend. It lets them easily gather financial information, swap investment ideas and track their holdings.

Unfortunately, the Internet also has opened up a potentially limitless venue for the promotion of extremely risky penny stocks.

A fresh reminder of that is the peculiar case of InVitro International, an Irvine-based company whose products gauge the effect of chemicals on human skin without requiring potentially cruel tests on animals.

In a three-day period earlier this month, its shares on the Nasdaq Bulletin Board, a largely unregulated electronic market, soared as high as 32 cents a share from 8.5 cents.

The price surge, accompanied by unusually heavy trading volume, may not sound like much with shares that trade for just a few cents, but it adds up to a startling 276%.

Within a few days, however, InVitro shares had fallen back, and they closed Friday at 13 cents--saddling investors who got in late with losses of as much as 59%.

What suddenly boosted InVitro’s stock isn’t clear. But in the weeks leading up to the price jump, an individual investor in the money-losing company actively tried to draw other investors’ attention to the stock by promoting it on an Internet penny stock site.

And the investor, after paying the Internet site to promote InVitro as a “new hot stock,” sold four-fifths of his stake during the three-day run-up for an apparent profit of $13,750.

What’s more, shortly before the stock moved up, two press releases were issued in the company’s name on an electronic news service. InVitro’s chief executive said he didn’t put out the releases and isn’t sure who did.

It’s common for investors to do what they can to help the stocks of companies in which they invest.

For individuals, that may mean buying a company’s products. For professionals such as mutual fund managers, it may mean discussing a stock they own in

a newspaper or magazine story.

But stock promotion at its most extreme can involve aggressive hyping of a stock to create a buzz that draws in new investors and lifts the share price.

It can be difficult to determine what constitutes overly aggressive promotion. Regulators simply advise investors to be wary of stocks that are actively touted on the Internet or anywhere else and to always check out companies fully before investing in them.

“No one should base their investment decisions on something they read on the Internet, period,” said John Reed Stark, head of the Internet program in the Securities and Exchange Commission’s enforcement division.

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InVitro seemed to have a bright future when it was founded in 1985. Its kits, sold to consumer and industrial companies, contain protein compounds that mimic the human body’s reaction to chemicals and are aimed at eliminating the need to subject animals to harsh tests. In late 1993, InVitro shares reached nearly $16.

However, the products never fully caught on, in part because the Food and Drug Administration has not taken a stance on whether the kits are a good replacement for animal testing.

In its 1997 fiscal year, InVitro lost $1.3 million on revenue of $720,000. Sales were down 32% from 1996.

Losses have mounted over the years to the point that InVitro revealed late last year that it might be forced out of business if it did not find a merger partner capable of providing a cash infusion.

Before this month’s run-up, InVitro stock had traded this year at an average price of 7 cents a share.

But InVitro recently found a supporter in Tom Zegan, an investor from Moreno Valley near Riverside.

In an interview, Zegan said he spotted InVitro when the stock was trading at about 3 cents a share. He said he bought 250,000 shares in March at an average price of 6.5 cents a share, or $16,250. He and W. Richard Ulmer, InVitro’s president and chief executive, say they have spoken on the phone and met three times at InVitro’s headquarters.

Zegan said he bought the stock after meeting with Ulmer and becoming convinced that InVitro has a “real product. . . . This could explode if the public was aware of it.”

Zegan said his investment strategy revolves around finding companies with depressed stock prices and working with managements to raise public awareness of them.

“My goal is to take companies I feel are undervalued and let people know about them, and they can decide if they want to own them,” he said.

Zegan said he suggested to Ulmer that they list InVitro on an Internet site targeted at small investors. Ulmer said he told Zegan he “wasn’t in favor” of being on such a site.

Zegan said one site he approached early on wanted $100,000 a year. Instead, he decided to pay $25 a month to have InVitro listed on the “Jolly Rodgers HOT Stocks” Web site (https://www.jstocks.com), starting about May 15.

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The site claims to have “hot stocks tips” and “interesting stocks for interesting people.”

The site’s home page does not inform investors that sponsors pay to have stocks listed there. Payment is made either by the companies themselves or by interested investors. About a dozen companies were listed on the site at the beginning of the month, but that has since been reduced to four, including InVitro.

At the time of the InVitro stock rally, the only indication on the Jolly Rodgers site that promotional payment might be involved was a mention at the bottom of the home page telling investors to click to another page for “disclosure.” There, Richard Rodgers, the site’s founder, told investors that he “may at times receive payment in stock or money for informing potential investors about companies” on the site.

After being asked about its policies by The Times, Rodgers added a second disclaimer near the top of the home page directing investors to the other page.

In an interview, Rodgers said he started the site two years ago because “my heart goes out to the small-cap penny stocks.” All the company information is accurate and the fees go toward “upkeep on the site,” he said.

On May 8, about a week before InVitro’s listing on the Jolly Rodgers site, a press release that appeared to be from InVitro was released to news organizations. It said the company had “retained” a firm called National Marketing Systems Inc. to consult on “marketing and distribution strategies, as well as [on] the handling of its public news releases.”

The release contains a two-sentence quote, allegedly from Ulmer, stating that National Marketing would keep InVitro on the “cutting edge” of “different marketing strategies.”

Zegan told Ulmer that he was affiliated with National Marketing, said Bob Sullivan, an InVitro spokesman. However, Ulmer did not authorize the release, the spokesman said.

Ulmer said Zegan initially offered to provide marketing services to InVitro for a fee and that Zegan wanted to “put out notification that we would be working together.”

“He told me he wanted to announce it, that he has lots of companies like this,” Ulmer said of Zegan. “I said, ‘I can’t stop you from doing anything, but if you expect to get paid from InVitro International, you’re sadly mistaken.’ ”

Zegan refused to comment on the May 8 press release.

A second press release concerning InVitro came out May 29. It said that Ulmer had done “numerous” phone interviews “with Dow Reporter’s Christopher Williams” and that a “detailed article” would be out sometime that week.

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It’s virtually unheard-of for a press release to be issued announcing simply that a CEO has talked to a reporter. What’s more, there is no publication by the name of Dow Reporter. The writer in question works for Dow Jones News Service, a unit of Dow Jones & Co., publisher of the Wall Street Journal.

In an interview with The Times, Williams said he had talked to Ulmer but has not written a story about InVitro.

Ulmer said he mentioned the interviews to Zegan and a handful of other shareholders in passing.

Zegan refused to comment on the second press release.

In an earlier interview, Zegan said he urged Ulmer to release any news about InVitro that could raise investors’ awareness.

“There’s a thing that no news is bad news and if you’re not releasing something people forget about you,” Zegan said.

He added, “Whenever we release news, it’s always the truth, it’s always the facts.”

On June 8, Ulmer told The Times that he had instructed Zegan a few days earlier “not to issue press releases that are confusing to our shareholders.”

The sharp rally in InVitro shares followed the May 29 press release. On Monday, June 1, the stock shot from 8.5 cents to 13 cents. The run-up continued through Wednesday, June 3, when the share price hit an intra-day high of 32 cents before closing that day at 25 cents.

During the three-day surge, Zegan said, he sold 200,000 InVitro shares at an average price of 15 cents a share, for a total of $30,000.

Subtracting his $16,250 investment, Zegan appears to have extracted a $13,750 profit. The remaining 50,000 InVitro shares he owns are worth $6,500 at Friday’s price of 13 cents a share.

Zegan said he sold the shares because he follows an investment discipline in which he sells 80% of his holdings in a stock after an initial price gain to assure himself a profit. He then holds the remaining 20%.

“I’ll hold these shares for who knows how long,” Zegan said.

Zegan said he would never try to manipulate a stock or push a worthless stock on other investors.

“There are enough ways to make money than to rip people off,” he said. “I sleep fine at night. I think what I do is a service.”

Zegan added: “If you’re asking, did I manipulate the price of the stock to go up, I’d say the stock was manipulated to go down [by brokerages, before he became involved with it]. That stock never should have been at 2 or 3 cents a share.”

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What about InVitro’s business prospects?

In the last two quarters, the company’s cash flow turned positive, according to Ulmer. But that was only because he did not take his regular salary, he said.

InVitro has sought to be acquired by privately held Miragen Inc. of Irvine. But Miragen also has financial problems and has been unable to raise the funds for the deal, Ulmer said. He also is acting CEO of Miragen.

As for InVitro’s current quarter, Ulmer said cash flow will be positive even if he draws his regular salary.

But how soon, if ever, InVitro might become a profitable company isn’t known.

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Walter Hamilton can be reached by e-mail at [email protected].

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Coming Back to Earth

In Vitro International’s shares spiked sharply during a three-day period earlier this month but have since given back much of their gain.

Friday close: $00.13

Source: Bloomberg News

Look Before You Leap

Here are some safeguards recommended by the Securities and Exchange Commision for investors using the Internet.

* Don’t believe everything you read online, and don’t assume that people are who they claim to be. Thoroughly investigate every possible investment before handing over any money.

* Before you invest, obtain written financial information, such as a prospectus, annual report and financial statement. Compare the written information with what you’ve read online, and watch out if you’re told that no information is available.

* Check with state securities regulators or the Securities and Exchange Commission to determine if any complaints have been lodged against the company, its managers or the promoter.

* Ask any online promoter where the firm is incorporated. Call the office of that state’s secretary of state, ask if the firm is incorporated in that state and whether regulators have a current annual report on file.

* Don’t assume that your Internet access provider or online service has approved or even screened the investment. Anyone can set up a Web site or advertise online, often without any check of legitimacy or truthfulness.

* Download and print a hard copy of any online solicitation you are considering. Make sure you note the Internet address, date and time you saw the offer. Save this in case you need it later.

* Don’t be embarrassed if you think you’ve been duped. Complain promptly to authorities. Doing so early gives you a better chance of getting your money back, protecting your legal rights, preventing others from losing money and assisting securities regulators in stopping investment fraud.

Source: Securities and Exchange Commission