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Truth Serum: Why You May Wish You Never Heard of Log On America

The stock's dropped by a third since it spiked on a seemingly promising <I>Business Week</I> piece. Talk about it on our message board.

We confess to not having been the least bit familiar with

Log On America


before Sept. 2, when the company's prospects were outlined in

Business Week's

Inside Wall Street column.

Trust no one when it comes to the media? Talk about it on our

message board.

The magazine reported that a "U.S. telecom company" was going to pony up $25 million for 10% of the Rhode Island outfit, then valued in the stock market at $172 million. Just that sentence was apparently enough to make half of America order bagels and LOAX for breakfast, sending the stock to an open of 25 1/4 that Friday from its close of 20 7/8 the previous day.

Soon after the open, however, Log On execs said a deal was in the works but by no means finalized. The shares, which had traded as high as 25 1/2, settled at 22 9/16 as volume shot to 1.8 million shares from the daily average of 129,409 shares, a clear sign of Inside Wall Street columnist Gene Marcial's power.

There's a catch, though. If you bought Log On America shares then, you got hosed. Specifically, at Thursday's close of 16 5/8, you're down some 35% if you bought at the shares' Sept. 3 peak.

Logging Off
Log On America shares slide following a sharp run-up

You shouldn't be surprised. While the story nailed some information that the company confirmed (though on a deal it has yet to consummate), the roots of that info are strangely intertwined. It comes from a small group of players who are closely, and in some cases intimately, connected.

Marcial says his story was on the mark, despite the company's reticence to help pull the bandwagon. "How can they say they have a deal before they do?" he asks. "They admitted they were in talks, right? I know there's a company that's very interested

in investing in Log On. I know that for a fact."

To support that "fact," Marcial leaned on Joseph Vaini, an analyst with an outfit called

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TheStreet Recommends

ITM Group

. Vaini says ITM does technology consulting for

Security Capital Trading

, which is the only firm that had an analyst covering Log On as of Friday. That analyst: famed whistle-blower and self-proclaimed short-buster Ray Dirks. Dirks' wife, Jessie Dirks, meanwhile, runs investment bank

Dirks & Co.

, which brought Log On America public in April.

Vaini and his ITM partner, Kazi Hasan, worked with Dirks at

RAS Securities

in the mid-1990s and spent time together at a string of other small, forgettable brokerage firms. In addition to having his


registration revoked and being censured and fined twice for not paying fines and running a firm without the proper capital, Hasan once settled with the


for buying securities to support an IPO in the secondary market and "inducing investors to purchase them." Hasan couldn't be reached for comment.

Dirks says he understands Hasan's disciplinary history comes mostly from administrative problems running his own firm and describes Hasan as "very upright." Hasan also was an analyst at

Prescott Ball & Turben

, which is defunct but was respected.

Dirks says he leans on Vaini because of his technology expertise.

So, if you're keeping score at home: Log On America was underwritten by Dirks & Co., is followed by one analyst, Ray Dirks, who used a small consulting firm run by two former stockbrokers to provide technology analysis. None of this is illegal. It does, however, raise the question of objectivity -- and it was never reported in

Business Week


Marcial, whose column is considered one of the last real consistently stock-moving pieces in mainstream journalism, says the relationships don't bother him. They didn't bother him, either, when he used Hasan and Dirks about 10 times each in the past 10 years to comment on stocks such as

Future Medical Products




), once a $3 health care stock that's now trading for a buck and change.

On the issue of links between Security Capital and Dirks & Co., Marcial says the firms weren't related: "I don't think

they were related, officially. It looks incestuous because it's husband and wife." Actually, it could look


incestuous only if they were brother and sister. Log On CEO David Paolo echoes Marcial's comments, saying he doesn't think there's an official relationship between Dirks & Co. and Security Capital. Dirks says he doesn't get involved with his wife's business and doesn't have "any say whatsoever" in its transactions.

Marcial says ITM's relationship to a firm married to Log On's underwriter was also of little concern. "I mentioned ITM," Marcial says. "I could have mentioned

Security Capital, but I didn't. What's the difference?"

"I stand by what I wrote and

Vaini stands by his report," Marcial continues, explaining that "I know the shorts are against this company." The story "stands and falls on its own merits," he adds.

But considering the relationship between Security Capital and the underwriter, along with a


article in May that raised suspicions of stock promoters (none of the people mentioned in this column figured in the


piece) working in Log On America stock, why even bother writing about this company?

Maybe we're wrong. Maybe the company is going to sign a groundbreaking deal with someone and run to 40. But either way, readers are entitled to know that the three or four people forming the image of the stock do business, and more, with one another regularly. It could only help you make a better decision.

Today, though, you're sitting on shares worth a lot less than you paid for them, watching 35,000 shares a day cross and wondering how you're going to get out of the position. And whether

Business Week

refunds the unused portion of a canceled subscription.

Senior writer

Jesse Eisinger contributed to this story.

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