Sequent Computer's Long, Cold Wednesday

An Oregon newspaper publishes a (disputed) story, and Sequent ends up on the Nasdaq most-active list.
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Who says no one reads newspapers anymore?

Investors in

Sequent Computer

(SQNT)

certainly wouldn't make that case after this week's events. The Beaverton, Ore., maker of computer systems saw its shares slide 13% Wednesday during a rare appearance on the

Nasdaq

most-actives list in which the stock more than sextupled its average daily trading volume.

Speculation abounded as Sequent's steady drop unfolded: Were earnings worries the culprit, or did the Street sense that

IBM

(IBM) - Get Report

, which agreed July 12 to acquire Sequent, was having second thoughts?

It turned out the answer was neither. In fact, one would have needed a subscription to the

Willamette Week

, an alternative newspaper in Portland, Ore., to know what sparked the trading flurry.

The story, written by Nigel Jaquiss and allegedly based on remarks by a Sequent employee, contends that the Beaverton, Ore.-based computer-systems maker booked as first-quarter revenue a $15 million-plus shipment that was never ordered by a closely held Maryland computer reseller called

Federal Data

.

The news, once it was posted on the Web Wednesday morning, was quickly disseminated to the Street. By noon, fund managers with large Sequent positions were so concerned about this news potentially derailing the IBM deal that "everyone was selling now and asking questions later," says one hedge-fund manager who unloaded his small Sequent position at around 12:30 p.m. EDT at 16 7/8 when Sequent stock was in free-fall mode. The stock closed Wednesday at 15.

Sequent later denied the allegations, which if true could mean big problems for the company. One memorable case bearing a superficial resemblance to these claims had Q.T. Wiles, chief executive of disk-drive maker

MiniScribe

, shipping bricks instead of disk drives as part of a vast false-billing scheme. Wiles was convicted in 1994 and sentenced to a 30-month jail sentence for securities and wire fraud.

The Sequent speculation hit the Web like a ton of Wiles' bricks. At 2:15 p.m. EDT Wednesday, the first Sequent email of the day popped up on the company's

Yahoo! Finance

message board.

"What in the H is goin' on!!??" wrote a poster named

maritrikaruna

. "Sequent is down 2 bucks. Is the deal dead? Please say it ain't so. Someone knows somethin (sic), and as usual, the regular investor is left out in the cold ... say your prayers ... I thought I was done with this board."

Since Sequent's stock had been flatlining ever since the IBM announcement last month, fund managers also had stopped following the company. That all ended Wednesday. "I was deluged with fund manager calls all day," says Jaquiss.

Consequences for Sequent
A newspaper publishes an article, and a stock tanks.

Source: BigCharts

One fund manager with a large stake in Sequent says the whole thing smelled a little weird to him. "The only thing that matters is what IBM thinks," says the West Coast mutual fund manager, who requested anonymity. "IBM isn't buying the company for its second-quarter results but for strategic reasons." He says he wasn't selling, though others clearly were, as big blocks of Sequent stock were being unloaded Wednesday afternoon.

An IBM spokesman said the company was referring all calls on the matter to Sequent.

With the message board raging and the stock dropping, Sequent needed to act. Sequent spokesman Mike Fay, who works out of New York, had resorted to a voice message that said simply: "We will be putting out a statement on the charges brought forth by the

Willamette Week

shortly."

By 3 p.m., the

Willamette

piece was posted on the Yahoo! board. "Oh no Joe," wrote

xxx_sqnt

. "If SQNT recognized the revenue in Q1, look out 'cause the SEC is going to drill them bad. The WW article states that SQNT did not recognize the revenue."

To add a little spice to this stew, Jaquiss wrote that "the Los Angeles office of the

Securities and Exchange Commission

is conducting a preliminary inquiry into how Sequent accounted for unconsummated sales." A spokesman in the SEC's Los Angeles office would only repeat the SEC's policy of neither confirming nor denying the existence of an investigation. Sequent's Fay says the firm hasn't been contacted by the SEC.

In a press release at 6:55 p.m. EDT Wednesday, Sequent said the charges were "patently false." Thursday morning, Fay had a chance to sort out a "nightmare" of a Wednesday. "We tried to get

Jaquiss to understand the situation for a long time, but there is still tons of implication in the article and no substance," he says.

Federal Data, the Sequent customer in Greenbelt, Md., that decided not to complete the deal, released a statement saying as much Thursday. The

Willamette

article asserts that the product left Sequent's premises on the last day of the company's first quarter, March 31. It then landed in a Portland warehouse and returned three weeks later.

"Yes, we did stage the order, but when it didn't book, we didn't recognize it as revenue," explains Fay, who says Sequent recognizes revenue only when a purchase order is completed.

"I didn't write this story with the stock market in mind, and I won't write the follow-up in with it in mind," says reporter Jaquiss, who says he has neither owned Sequent stock nor worked for the company.

Gary Helmig, a hardware analyst at Sequent underwriter

Soundview

, says a disgruntled Sequent employee may be responsible for the story. "Even with that order, Sequent would have recorded a lousy quarter," asserts Helmig, who rates Sequent a hold. "And Sequent's second quarter was a disaster." Helmig echoes the belief that IBM cares more about Sequent's technology than its execution.

On July 22, when it reported results for its second quarter ended July 3, Sequent revealed a loss of $16.5 million, or 39 cents a share, on revenue of $143.5 million. The company referred in its earnings press release to "the quarter's poor showing" and attributed many of its problems to the pending IBM deal.

For its first quarter ended April 3, Sequent earned $1.2 million, or 3 cents a share, on revenue of $194 million.

So now Sequent wants a retraction. But "I don't think we are going to take it any further than that," says Fay.

The lesson learned from this tale is that the Web can quickly spread information to everyone, everywhere, and not to believe the first thing you read -- or even the second.

After all, the story is only 48 hours old.

We're depending on our readers for sources, rumors and ideas. Send any to our Truth Serum hotline at

truth@thestreet.com.