Warning Signs Need to Be Heeded

In the fast-and-loose world of investing, sometimes folks get blindsided. Other times, however, they just have blinders on, proving the adage that warning signs are only useful if they are heeded.

Here are some examples where a good heads-up was readily available:

The Shareholder Letter

Paul Metzinger, president of Intercell (INCE:OTC BB), wrote in a letter to shareholders last month that current management basically didn't understand the company and were unsure whether certain valuable assets still belonged to the company. Wrote Metzinger, who was named president just last year: The current management "acquired ownership in the company based almost exclusively upon a belief in the perceived value and potential of the antenna technology, but not upon an accurate understanding of the company."

His confusion may be forgivable. Intercell is a Denver-based tech holding company whose core operations have changed so many times in the past several years it remains unclear exactly what the company does. Earlier this year the company sold, for no profit, the antenna operations it had been touting as its potential cash cow. The company that bought the antenna business, composed of Intercell insiders, recently filed for bankruptcy protection.

There is no question about the direction of the company's stock price, however. Intercell's stock has dropped with the trajectory of a sack of nickels, falling about 98% in the past year, to around 8 cents, from its 52-week high of 4 3/4.

Metzinger said the reaction to his letter was positive. "I think people appreciated the candor." Perhaps, but clearly some were unhappy with the content. Internet posters have been chatting about lawsuits, especially since Metzinger's missive arrived in the mail.

The Auditor's Comments

Registry Magic may not want to give its independent auditors, BDO Seidman, the helping-hand-of-the-month award. In Registry Magic's initial public offering filing last month, its auditors raised "substantial doubt about the company's ability to continue as a going concern."

In making the damning determination, BDO Seidman noted that Registry Magic, a speech recognition software company based in Boca Raton, Fla., has a "dependence on outside financing, lack of existing commitments from lenders to provide necessary financing, lack of sufficient working capital, and losses since inception." Registry Magic has lost almost $2 million since its creation in October 1995 and predicts it will continue to run in the red for the foreseeable future.

Undeterred by its own auditors' evaluation, Registry Magic still plans to raise $10 million through its IPO and is just waiting for Securities and Exchange Commission approval of the registration to proceed, said Martin Scott, the company's CFO.

Scott says the paragraph from Seidman is not unusual, and, in fact, is the standard for most development-stage companies, such as Registry Magic. "Many companies go public with that distinction," say Scott.

Perhaps, but that doesn't mean investors will flock. One fund manager that specializes in more speculative companies found the auditor's language unusually strong. "I read my share of [red-herring prospectuses] and I've never seen that -- a warning like that would be a red flag for me," he said.

The Disclosure Statement

A number of those writing in to Wall Street Whistleblower mentioned several stock-touting online newsletters or Web sites that had led them astray. Several readers cited FutureSuperStock and others that they said seemed to be hyping stocks at the behest of some companies.

In checking out several of these, Whistleblower discovered most of these publications or Web sites -- including FutureSuperStock -- carried carefully worded disclaimers saying the site or newsletter gets paid by the very companies whose stock the publication is praising. Others also stated they may own the stocks they are describing.

For example, the disclaimer on the Internet Stock Review states: "The Internet Stock Review and/or its employees, officers, affiliates or members of their families may have long or short positions in any of the securities discussed in this or other reports. (the site) may derive compensation through research services and subscriptions and/or investor-relations consulting from the companies featured or mentioned in its reports."

Can't get any more plain than that, yet many readers complain these sites gave them stock tips that later did not pan out. No kidding.

Time's Up!

JT's Restaurants (JTSR:OTC BB), which floated via email a promise that an investment in its stock would "double your money by Easter," laid a big, colored egg after it missed its deadline this past Holy Sunday.

The stock finished at 2 3/8 last Thursday (the last trading day before the holiday), a full 94% short of its avowed goal. Even the announcement of an acquisition last month couldn't lift the stock past the hurdle. The stock was at 2 1/4 when JT's investor relations group made the promise last month.

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