From a Nixon-era accounting blowup to postbubble stock promotion, Ray Dirks has been a central player at Wall Street's lurid fringe for decades.
But the end of the line could be approaching for the 69-year-old analyst, broker and small-cap stock specialist, whose name has even been linked to current
Dirks, currently a managing director at Sky Capital in New York, faces an NASD enforcement action that alleges he pumped up a handful of penny stocks while working at Dirks & Co., a brokerage owned by his wife.
In a complaint filed in December, regulators contend the couple failed to tell customers that they were making a market in stocks they were simultaneously praising in their in-house research. A trial before a NASD panel on the complaint is pending. A finding against Dirks could strip him of his brokerage license and force him to forfeit any ill-gotten gains.
This isn't Dirks' first brush with the law.
In 1983, he became something of a Wall Street folk hero when he fought the
Securities and Exchange Commission
tooth-and-nail on an insider trading charge and won. In that battle, the SEC charged Dirks, then an insurance industry analyst, with insider trading for quietly telling some of his big brokerage clients about a massive accounting fraud at a company called Equity Funding. The Supreme Court, in a
landmark 1983 decision, sided with Dirks and ruled he was only doing his job as an analyst.
More recently, regulators threatened to suspend Dirks' brokerage license last summer because he'd failed to come through with his end of a settlement in a dispute with a former customer. Now regulators are gunning for Dirks because of his equally legendary reputation for touting little-known small-cap stocks with dubious prospects.
The NASD complaint mainly focuses on reports prepared by the Dirks for four nondescript companies: DataLogic International, Carnegie Cooke, Thane International and Transmeridian Exploration. Each of the reports, all issued during the summer of 2002, carried strong buy recommendations and extravagant price targets and earnings estimates, even though all the companies were penny stocks with scant revenue.
In the case of Transmeridian, the report written by Dirks and approved by his wife Jessy set a one-year price target of $3 on the stock. At the time, shares of Transmeridian, an oil and gas concern, were selling for about 50 cents.
Yet Dirks foresaw great things for the tiny company. He predicted that revenue would soar from $5 million in 2002 to $200 million in 2004. Dirks left out that the company's auditors had expressed reservations about Transmeridian's ability to continue as a going concern.
Today, DataLogic, Carnegie Cook and Thane all trade for well under $1. Transmeridian trades for about $1.50, but its 2003 revenue will come in well under $250,000 and the company was on a pace to lose about $5 million. The company's auditors still have doubts about the company's viability.
Dirks refused to discuss the NASD action. Reached at his office at Sky Capital, he hung up the phone several times when questioned about the pending disciplinary proceeding.
Touting small stocks is nothing new for Dirks.
In the fall of 2001, soon after the Sept. 11 terror attacks and the anthrax-letter murders, Dirks threw his weight behind a small money-losing company called Vital Living Products that claimed to have developed a do-it-yourself anthrax-detection kit. Dirks arranged for the company's president to debut the life-saving product at a media event at New York's Friars Club -- which is better known for joke-telling than killing deadly germs.
In the panic-filled weeks following Sept. 11 and the Friars Club appearance, shares of Vital Living soared 4,000%, from a nickel to $2. But the euphoria quickly evaporated when agents from the Federal Bureau of Investigation arrived at the company's North Carolina headquarters with search warrants. In early 2002, Vital Living reached a settlement with the Federal Trade Commission over allegations that it "deceptively advertised" its PurTest Anthrax Test kit.
But neither the Vital Living imbroglio, nor the latest regulatory flap, seem to have slowed Dirks.
He's currently a managing director of institutional sales at Sky Capital, a three-year-old New York-based investment firm. Dirks joined Sky Capital in August 2002, a few months before Dirks & Co. officially shut its door in October of that year.
To date, Sky Capital hasn't generated much news. But the firm came close to striking gold with Vaso Active, a small-cap company that has seen its stock soar to $29, a whopping 460% increase since the company's $5-a-share offering in mid-December.
Until last October, Sky Capital was listed as the sole underwriter on the initial public offering for the money-losing company with less than $100,000. The company, however, claims to have developed a novel treatment for athlete's foot called Termin8, which uses "
a revolutionary transdermal drug-delivery technology." Dirks was listed as the point man for Sky Capital on the offering in the company's September regulatory filing.
But without any explanation, Sky Capital and Dirks suddenly disappeared from Vaso Active's pre-IPO filings. In November, a new underwriter emerged to take Sky Capital's place, Kashner Davidson, a small Florida-based investment that was sanctioned by the SEC in 1996 for having an improper relationship with a stock promoter. Kashner has a history of managing IPOs for penny stocks.
Dirks won't comment on the Vaso Active stock deal, in which Kashner ultimately raised $8.3 million for the company in a $5-a-share offering. David Garbus, a lawyer for Massachusetts-based Vaso Active, also declined to comment.
Michael Recca, Sky Capital's president in New York, said the firm withdrew from the Vaso Active offering because it had some concerns about completing the deal, which would have been the firm's first initial public offering. He said Sky Capital has had no dealings with Vaso Active since it withdrew from the IPO, although he said some of the firm's customers may own shares of the pharmaceutical concern. He said it's possible that some of Dirks' customers may own shares.
Sky Capital, however, has another connection to Vaso Active. One of Vaso's directors, Gary Fromm, also is a director of Sky Capital Ventures, a subsidiary of Sky Capital. Fromm, who works out of Sky Capital's London office, could not be reached for comment.
Recca said Sky Capital has never had an equity investment in Vaso Active.
As for the NASD allegations against Dirks, Recca said the firm's attorneys are investigating them. But he noted that the NASD action concerns events that happened while Dirks was working elsewhere.
Meanwhile, trading remains brisk in shares of Vaso Active, with an average of 1 million shares changing hands each day the past two weeks.