It's Hard to Hide a 79% Loss, but Jacob Internet Is Trying

(JAMFX - Cramer's Take - Stockpickr)Jacob Internet fund's 79.1% decline in 2000 is one of the worst one-year performances in mutual fund history. But you would never know it from reading the fund's prospectus.

Ryan Jacob, the fund's manager, seems to be using every legal trick in the book to keep his fund's recent travails out of its prospectus and marketing brochure -- two important sources of information for prospective investors. The fact that Jacob can avoid mentioning that his portfolio lost nearly four-fifths of its value in one year shows how toothless reporting requirements can be.

One gimmick Jacob is employing is keeping a stale prospectus on his Web site. The online prospectus says the fund's performance table "will be available to track the Fund's performance once the Fund has been in operation for a full calendar year." The calendar year is more than two weeks passed, but the Web site prospectus still does not detail its abysmal performance in 2000.

But don't expect last year's performance to appear in the prospectus when Jacob gets around to posting the updated version. He's filed an amended prospectus with the Securities and Exchange Commission, but is in no rush to make it available to investors.

By filing on Dec. 29, before the end of the calendar year, Jacob will be able to omit last year's record-setting decline until the next required update, which won't be until Jan. 1, 2002, 25 months after the fund's launch in November 1999. In the meantime, investors will be asked to judge Jacob's fund based on its performance from its Dec. 14, 1999, launch through the Aug. 31, 2000, end of its fiscal year. As we'll see, even that information is hard to come by.

So what's the harm here? After all, investors can get current performance information from Jacob's Web site, which is updated daily and easier to access than the prospectus or brochure. But for investors who buy funds through brokers, the prospectus and the fund's brochure often will be the only documents that they see.

The Other Internet Fund

This isn't to suggest that Jacob would leave his fans without any inkling of his stock-picking prowess. Both the current and updated prospectus include an easy-to-read performance table. It's just not for Jacob Internet.

The only performance table in the Jacob Internet prospectus is for the (WWWFX - Cramer's Take - Stockpickr)Kinetics Internet fund. Jacob managed Kinetics Internet from December 1997 through June 1999, when he posted a whopping 232% cumulative gain.

Although Jacob hasn't made much of an effort to communicate Jacob Internet's performance in his prospectus, he went to great lengths to ensure that Kinetics Internet's performance was. Jacob delayed his new fund's launch for four months while he fought with the Securities and Exchange Commission about whether and how he could present the performance of the fund he once ran.

In his initial filing in July 1999, Jacob claimed that he "had full discretionary authority over the selection of investments for" Kinetics Internet during the 18-month period in which it produced a 232% return.

Four months later, this claim had been removed and the prospectus conceded that Francis Alexander has "assisted" Jacob in managing the fund. Alexander also suddenly appeared as a portfolio manager of Jacob Internet, as did the measly 2% return he achieved at Kinetics Internet before Jacob replaced him as the lead manager.

In other words, the SEC apparently told Jacob he couldn't use Kinetics Internet's performance unless two conditions were met. The other person responsible for the fund's performance -- Alexander -- had to continue to work with Jacob at Jacob Internet. And Alexander's performance at Kinetics Internet had to be added to the prior performance table.

The fund's online brochure is silent about Jacob's 232% gain at Kinetics Internet, and Alexander appears only as an afterthought (he's not listed in the management section with Jacob and analysts Michael Dubrow and Darren Chervitz). In the printed brochure, Alexander isn't mentioned at all.

Jacob's Kinetics Internet record isn't in brochures because they are regulated by a different agency, the National Association of Securities Dealers, which refuses to permit managers to advertise a prior fund's performance in brochures because it can "mislead or confuse investors about the contributions of other personnel [whose] efforts ... are, in most cases, critical to the mutual fund's performance."

The NASD apparently has no objection, however, to Jacob doing indirectly what he could not do directly. The brochure immediately follows a reference to his former position at Kinetics Internet with: "Mr. Jacob has a proven track record of successfully investing in Internet-related companies through volatile market conditions."

While these words won't have the same effect as Kinetics Internet's triple-digit performance numbers, they still make Jacob's point: "Invest with me and I'll do for you what I did for Kinetics Internet."

Jacob did not return several phone messages left with his assistant.

New Prospectus in the Wings

Eventually, industrious investors will be able to extract limited year-2000 performance data from the fund's prospectus, but only if they look very carefully.

When Jacob makes the new prospectus available -- the filing is currently accessible on the SEC's electronic database -- the financial statements will show that the fund's return for its first fiscal year, Dec. 14, 1999, through Aug. 31, 2000, was negative 45%. But Jacob has ensured that investors probably won't read or fully appreciate this data. The performance table on page 2 of the new prospectus says that year-2000 performance simply is not available, and pointedly makes no mention that fiscal-year data is available in the financial statements on the last page of the prospectus.

Even readers who do find the information may not appreciate the fact that the negative-45% figure represents cumulative performance. Jacob had the option of providing an annualized figure, which would have shown an even bigger loss and would have been easier to use in comparisons with other funds, but he chose not to do so.

A Silent Warning

Jacob's lax prospectus updating also appears to extend to an amendment he filed with the SEC in May 2000. The amendment was intended to warn investors that many Internet companies had incurred large losses and were expected to continue losing money for the foreseeable future.

But something must have happened on the way to the printer. The warning, now even more apropos than in May 2000, never made it into the prospectus on Jacob's Web site. It was included, however, in the mailing I received from the fund company.

This cautionary text about Internet company losses stands in stark contrast to the statement in large type on the inside cover of Jacob Internet's brochure: "We expect the continuing evolution of the Internet to yield profitable investment opportunities for the discriminating investor."

The failure to update his prospectus with that warning language may spell legal trouble for Jacob. Selling securities off a stale prospectus violates securities laws and can entitle shareholders to return of their original investment. Since the amendment was filed, and the online prospectus became stale, the fund has dropped 68%.

It also wouldn't be surprising if Jacob received a call from SEC examiners asking why he isn't complying with basic legal requirements, and why he's still putting the Kinetics Internet fund's performance in his prospectus if Alexander is no longer "assisting" him at Jacob Internet.

So don't be surprised to see an updated prospectus on Jacob's Web site shortly.

But even if Jacob had complied with legal requirements, SEC rules still would allow him to trumpet his performance at Kinetics Internet, achieved more than 17 months ago, while omitting his abysmal performance in 2000 from his prospectus 25 months after he launched his fund.

The SEC-sanctioned prospectus should be the most reliable, accurate source of information about a fund. Yet in this case, it is arguably the most misleading. Before questioning Jacob about his shady disclosure practices, perhaps the SEC would do better by first examining the poor example set by its own performance disclosure rules.