Another Little-Guy Lesson

This week's selloff in Tibco shows the frequent disadvantage of being a retail investor.
By Bill Snyder ,

It's bad enough to lose money in the market, but when you think you've been had, it really smarts.

This week's meltdown of

Tibco Software

(TIBX)

, a business software vendor that shed

40% of its value in less than two weeks, has a lot of retail investors feeling like they are not playing on a level field.

"There should be an

SEC

investigation into this," fumed one investor who wrote to

TheStreet.com

this week. "As usual, Average Joe investor gets no news and somehow institutions have been leaked this news so they sell and once again we get screwed. This is criminal activity."

Did John Q. Citizen, as the writer called himself, really get cheated, or was he merely outgunned by professional investors with more money and resources?

It's impossible to know for sure -- and Tibco wouldn't comment on its stock movement -- but Wall Street insiders and corporate watchdogs know that even when everyone plays by the rules, the retail investor is still at a disadvantage, despite recent remedies that have made it illegal for a company to selectively disclose material information.

And Tibco's ugly slide shows how quickly the average investor can take a hit while the pros are making money on the same stock.

During much of February, Tibco's daily trading volume averaged 2.4 million shares a day, and on Feb. 18 the stock closed at $11.88 -- its best price since early January. By the next day, the stock was pulling back, in what seemed like a normal spate of profit-taking. But five days later, volume spiked to 4.8 million shares and was almost as high the next day. By then, the stock was off 10% from its monthly high -- on no news.

The slide became a rout on Monday when Bear Stearns analyst John DiFucci published a note before the market's open saying the company was likely to miss its first-quarter numbers. DiFucci's report pushed volume to 13.7 million shares and knocked another 8% off the stock. Interestingly, DiFucci referenced the stock's earlier slide and fears that Tibco would not make the quarter saying, "Recent declines in the stock price probably already reflect some of this."

DiFucci was right about the quarter: Tibco warned after the bell on Tuesday and investors capitulated, selling off 75 million shares in just two days. And he was probably right about the leak.

Risky Business
Tibco's shares started to plunge before the company's profit warning

Note: February average daily volume through Feb. 23 was 2,412,437.5

It's worth noting that more than 80% of Tibco's public float is controlled by institutions, so once a serious move started, it became a stampede. And that's not a good place for a small investor to be caught.

The pattern of trading is suspicious, suggested Greg Taxin, CEO of proxy advisory firm Glass Lewis.

But portfolio managers and analysts at an investment conference in San Francisco this week said they didn't need to wait for an investigation. "Of course someone leaked the information," said the manager of one West Coast hedge fund. "Nothing else would explain that kind of stock movement."

One possible scenario: a "noisy short." If a short-seller got wind of the blown quarter -- either legally or illegally -- he or she could have pushed the stock down by leaking the information as widely as possible. And that would explain the heavy volume before DiFucci published his note.

But smaller investors were also irked because of their impression that rules were broken. Another reader who wrote to

TheStreet.com

asked: "If the company announced its disappointing results post-closing yesterday, how does the high volume decline begin a week ago? Wasn't FD supposed to address this?"

Yes -- and no.

Passed in 2000, Regulation FD says that when a public company chooses to release any material information, it must be done in such a way that the general public has access to it at the same time as institutional investors and analysts. That's why conference calls during earnings season are now Webcast and why companies have become so cautious in one-on-one meetings with analysts and reporters.

In five years, however, the SEC has only charged five or six companies with a Reg FD violation, according to a commission spokesman.

Does that mean it's not effective, or has it perhaps been a deterrent? "I believe FD is alive and well," said William Lawlor, who heads the M&A practice of the Philadelphia-based law firm Dechert LLP. "I believe most companies are very conscious of the rule and very sensitive about disclosures," he said.

Clearly, there are critics of the regulation who would say that Lawlor's evaluation is too sanguine, but in any case it's important for retail investors to realize that many legal ways exist for well-heeled traders to get actionable information.

Analysts and their associates, for example, now spend a significant amount doing "channel checks," calls to customers and distributors of a company's product to find out how well it is selling. "Not only is there nothing illegal about that, it's what makes the market efficient," argues Taxin.

Rather than simply paying for sell-side research, some institutional investors are paying analysts to set up meetings with company executives. There are even companies like Vista Research and the Gerson Lehrman Group whose major focus is connecting well-placed industry sources with investors.

Are those meetings illegal? Not at all --

unless material information is disclosed.

However, because it's not hard to imagine someone crossing the Reg FD line in such a situation, the SEC is rumored to be investigating those practices.

So, how do you avoid another trampling? One way to even the odds a bit: avoid extremely volatile stocks, which tend to move the most on rumors and speculation. Check the size of the public float and compare that with the average volume over a period of time. If a small number of investors are moving the stock, you might want to steer clear.

And stay away from the elephants.

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