Columnist's Tipster Settles SEC Late-Disclosure Case

Planning to read BusinessWeek's Inside Wall Street column first thing Friday morning? Read this first.

A Securities and Exchange Commission penalty brought against an investor Thursday illustrates once again why followers of Gene Marcial's oft-criticized column are frequently left out in the cold when it comes to so-called hot stocks.

Marcial's weekly column is often the catalyst for higher volume and prices in many formerly unheard-of stocks. Sometimes the picks perform well. But many times the bullish arguments, including takeovers and robust growth predictions, fail to pan out after an initial one- or two-day trading pop. Check out the barely believable prediction on American Express (AXP) a few months ago, which fueled a 7% one-day gain in the stock.

Tarnishing?

An SEC complaint and fine imposed on investor Jack S. Silver on Thursday in New York illustrates why investors need to be cautious about heeding the Inside Wall Street column. Silver, the head of Siar Capital, was fined $50,000 without admitting to or denying allegations that he filed "untimely and misleading reports concerning his beneficial ownership" of TransAct Technologies (TACT).

In comments published in a column Sept. 22, 1997, Silver told Marcial that TransAct had a "fast earnings growth kicker" and that the "likelihood of a takeover is quite high." The problem? According to the complaint, Silver didn't disclose that between late August and late October, he was busy unloading the more-than 5% stake -- about 550,000 shares -- of TransAct that he had acquired around March. Neither Marcial nor Silver was immediately available for comment.

Silver was selling his shares after his active efforts to negotiate a sale of the company proved unsuccessful, the SEC complaint alleges. So at a time when he was already aware that the attempted sale wasn't going to go through, Silver was unwinding his stake at prices between $16 and $18 a share and telling Marcial that he figured, "TransAct is worth 25." In an SEC news release issued Thursday, the agency said, "Silver's undisclosed sales occurred at a time when the news media were raising hopes of a potential acquisition of TransAct at a premium, which Silver knew would not occur."

Late to the Party

Silver was criticized for late filings in both registering his ownership of the shares and disclosing that he sold the shares. "Although required by law to disclose these sales in timely amendments. ... Silver did not do so until Nov. 13, 1997, approximately two months late. By delaying his filing until November 1997, Silver was able to sell all of his TransAct shares before disclosing any of his sales to the rest of the market," according to the SEC complaint.

Among Silver's actions cited in the complaint were "contacting a reporter for BusinessWeek several times to encourage him to write a favorable article about TransAct and its appeal as a takeover target." Some information in the article, including the fact that Silver held an 8.3% stake, was no longer true when the story was published, the SEC said. That can hardly reassure readers about the reliability of Marcial's report.

An Inside Wall Street "Report Card" published by BusinessWeek in July 1998 noted that TransAct jumped 10% in the month after the column ran. Subsequently, it dropped 35% over three months and 45% over six. The stock closed down 10 cents to $8.90 today, putting it at around half of its price the day the item ran.