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A Closer Look at the Waaco Kid and His Internet Gang

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By Erle Norton
Staff Reporter

Like a Wild West boomtown, the

Waaco Kid's Forum

sprung up a couple of years ago as an email exchange for investors hungry for information on ignored micro- and small-cap stocks. The idea was to give small investors quick scuttlebutt on these companies, much like the rapid-fire flow of information big Wall Street investors share about big companies.

But the Waaco Kid's Forum's rapid growth (as many as 10,000 members today) and ambition have also led to greater scrutiny. And it looks like the gunslinger of the Net has some problems. While it certainly appears that the Waaco Kid operates within regulatory confines, questionable performance claims, cozy relationships between Waaco affiliates and featured companies and a recent executive shuffle raise questions about the forum's authority and effectiveness.

Despite these simmering woes, investors have lapped up the chance to swap ideas in this cybercommunity with the actual Waaco "Kid" -- Gayle Essary, a former journalist who has worked at several trade publications. As the forum has grown, Waaco's distinct but affiliated

StreetSignals

email investment newsletter, formerly called

HotStocks@StreetLevel

, is quickly adding readers.

StreetSignals

is now reaching 100,000 readers through

Telescan

(TSCN)

, which operates online networks and sites. Essary also is CEO of a company called

NetCapital Communications

TheStreet Recommends

, which, through a subsidiary, owns a nonprofit organization, the

Investors Research Institute

, aimed at spotlighting promising companies, as well as Web sites.

Essary's stated goal: With Waaco as a platform, to challenge the successful

Motley Fool

investment site on

America Online

(AOL)

.

But along the way, his entities have made a series of moves that at best are stumbles and at worst are highly disturbing for investors.

Most troubling, Waaco frequently touts its record at picking stocks. It said, for instance, in a May 20 email that its picks in its first two years soared 93%. But a close look at Waaco's list of picks shows discrepancies. For example, Waaco said

Boyds Wheels

(BYDS)

climbed 21% from 7 1/8 on March 3 to 8 3/8 on an unspecified date. But according to data trackers

Baseline

and

ILX

, Boyds' low on March 3 was 7 1/4. In addition, the 21% figure is incorrect. If Boyds had climbed from 7 1/8 to 8 3/8 it would have risen 17.5%.

Another example is

Neotherapeutics

(NEOT)

, which Waaco says soared 118% from a low on March 31 of 4 13/16 to 10 1/2 on an unspecified date. That percentage is correct, but the company's low on March 31 was 5 1/4, according to Baseline and ILX, which drops the gain to 100%.

Essary, who moderates the forum, stands by Waaco's figures. "If anybody ever traded 1,000 shares

of these stocks and took that money and added it to the next stock, they could buy six Bill Gates," he says.

Yet even if by some freak occurrence the stocks did rise by as much as Waaco claims, investors would have had to have timed their trades perfectly to reap the stated gains. Essary says that's the point of Waaco's "Textbook Investment Method," which says, among other things, "Make sure you are comfortable with the fundamentals of the stock and hop on board for the gravy train. Sell into declines, buy into gains, and your buying and selling enhances the volatility of the advances and declines."

One company Waaco -- and the Investors Research Institute -- highlighted was

Genesis International Financial Services

, a Chattanooga, Tenn., conglomerate that the state of Tennessee is liquidating after having found in April that it had questionable assets and little income beyond what it got from stock sales. Even as Waaco talked up Genesis, the company filed a financial statement on Jan. 2 with the

Securities and Exchange Commission

that raised several questions about its viability, including a glaring issue: Its balance sheet didn't balance.

It's bad enough that Waaco missed this publicly available information. But it gets worse. A Waaco "member" confronted Essary with these issues, and Essary dismissed them in an April 12 email (before the state stepped in) as "a mixed bag of innuendo and unsubstantiated conclusions." He even brushed aside talk that Genesis' CEO carried a briefcase full of cash and jewels, writing in a letter to the CEO that although this behavior seemed odd he found "this anomaly to be normal for you."

Essary now says he believed Genesis' officials because he thought then that what a company said "was the gospel," in part because company executives would be held liable for making false statements. But he promises that he has adopted a new approach: "Today, we're going to assume a company is lying," he says.

Who "we" are can be a bit confusing. Apparently, Essary figured he needed more than just the forum and newsletter to root out promising companies, so he set up the nonprofit Investors Research Institute, which spotlights companies at monthly meetings in New York and even retained an analyst to write research reports on companies.

One technique Investors Research Institute uses to gain exposure for these tiny companies is called its Elite Corporate Membership Program, which includes research coverage by Safety Harbor, Fla., firm

J. Freedman & Associates

. But members must pay the Institute $2,750 a month, which raises questions about whether the research reports are truly independent.

Essary says the research reports are independent because the analyst is retained by the Institute, not the company. Ellery McLanahan, a spokesman for J. Freedman, notes that the firm could just as easily write a negative report on a member.

Perhaps, but the paid membership isn't the only thing troubling about the Institute. There's also its leadership. Essary chose Daniel Meisenheimer III to head the Institute. Meisenheimer heads two publicly traded companies,

Meisenheimer Capital

(MEIS:Nasdaq) and its subsidiary

U.S. Basketball League

(USBL:Nasdaq). Essary says Meisenheimer was perfect because he heads a minor-league basketball association and because his "integrity is unassailable."

But while Meisenheimer was in the Institute's top spot, the

HotStocks@StreetLevel

newsletter -- published by a unit owned by NetCapital -- highlighted his companies. At a minimum, the arrangement created an appearance of impropriety, but it also seems risky investment-wise. A look at Meisenheimer Capital filings with the SEC shows that along with the qualified opinions from auditors, Meisenheimer Capital also had to amend an October 1996 filing three times because of concerns expressed by the SEC staff. For instance, the basketball league swapped five franchises in fiscal 1996 for advertising bills valued at $600,000 in one filing but slashed that figure to $250,000 later.

Essary says he didn't "know anything" about the filings. He also says he has gone to great lengths to separate Waaco,

StreetSignals

and the Institute. For instance, NetCapital's stock in the Institute's parent company is nonvoting.

After Meisenheimer was asked about the filings and the Investors Research Institute on Wednesday, he

resigned as chairman of the Institute. Meisenheimer's attorney, Richard Blumberg, said Thursday the SEC just wanted "a little more explanation" and called the requests for more information "ordinary." Gary Cella, president of the Institute, also told

The Street

this week he resigned, though he continues as president of its parent company.

Finally, the Waaco-affiliated

StreetSignals

email newsletter appears to have exaggerated its ties with outside companies. For instance, even though signing up with Telescan represents a milestone for

StreetSignals

, it isn't as big as the newsletter report. In a May 20 issue it said beginning June 1 it "expands its distribution for a full month to more than 250,000 daily readers on Telescan." A Telescan spokeswoman, however, puts the investment information service's readership at about 100,000. Says Essary, "That's the information they gave us."

For his part, Essary chalks up any problems at Waaco to growing pains. "We have to crawl before we can walk," he says. "We have to walk before we can run. We have to fall off the bed sometimes. Give us some slack here."