A lot of interest has been stirred up lately in a company that virtually no one knew anything about until a couple of weeks ago. The company -- a New Jersey-based financial newsletter publisher called Jagnotes.com (JNOT:OTC BB) -- had toiled in obscurity for a decade, producing a daily report on brokerage firm recommendations, upgrades, downgrades, earnings predictions and so on. In 1995, Worth magazine described the newsletter as having a shabby, slapped-together, amateurish look, and the description seemed, if anything, too kind.
But then, beginning in February, things changed dramatically. First, the company opened up a
Web site to distribute its newsletter. Then on March 25, it took over a penny-stock shell company with 12.3 million shares of stock that had been selling for barely 50 cents per share on the over-the-counter bulletin-board market. Simultaneously, the company changed its name to include a ".com," and shortly thereafter announced that it had hired a faded financial commentator to write a daily stock-tip column to dress up the operation and give it a bit of class.
Result? A week and a half later, the stock hit 17 -- a run-up of 3,300% -- although it's back to just a little more than 12 today, and Jagnotes.com now sports a market value of more than $150 million -- all this on no published financials and 1998 gross revenue that looks to have been barely $1.2 million.
There's a lot to be said about the state of a stock market in which things like that can happen -- even if the stock in question turns out to carry a ".com" in the name and be traded on the crooked-as-a-dog's-leg OTC bulletin board. And there's also something -- in fact, rather a lot -- to be said about the business practices of the company itself, which is selling investment research it doesn't clearly own and, according to one view of things, may be improperly acquiring to begin with. Finally, one might even be inspired to offer a thought or two concerning the suddenly resuscitated career of the financial columnist in the affair,
, who was forced into retirement a couple of years back under circumstances that have never been fully ventilated or explored.
Yet the real, and ultimately most enduring, issue that wafts from these events is one that Wall Street investment bankers and analysts rarely if ever talk about, perhaps because the implications of the matter are so daunting for the industry: Are big investment firms on Wall Street using their research in a way that consciously manipulates the market to the advantage of their own clients while exploiting the general public?
The question arises because of the industry's longstanding and widespread practice of cloaking its research in the mantle of "private" or "proprietary" property until the firms' own clients have had a chance to place their bets on the advice. Once that happens, the firms then alert the newswires as to what their analysts are predicting and the information instantly becomes "public," causing prices to rise or fall as everyday investors react to the news. By that time, of course, the firms' clients have already profited.
Cynical as it may sound, that pretty much sums up Wall Street's venerable practice of the "morning call" report, the tradition in which research analysts at firms all across Wall Street hold squawk-box conference calls with their firms' brokers and salespeople every morning.
This cozy arrangement has been going on openly for so long that no one thinks anything of it, though it obviously amounts to legalized manipulation of prices. But now comes the Jagnotes.com operation, ready to upset the whole apple cart. That is because, for all the slapdash amateurishness of its reports, the company has nonetheless managed to set up a functioning network of spies and sources all over Wall Street -- tipsters who automatically pass along news of what gets said at the conference calls the minute they end.
For years, the Jagnotes operation would collate this information as it arrived, then fax it around to subscribers willing to pay $1,850 a year for the service. The fellow who runs the operation, a thirtysomething ex-broker from
named Gary Valinoti, said the operation currently has 650 subscribers, which works out to about $1.2 million in yearly revenue, a small-beer operation by any reckoning.
'That's our research,' said an official at
. 'And the reason it has value to Jagnotes is only because we created it. So what makes them think they can sell it just because they got hold of it?'
But having shifted to the Internet and opened a Web site, Valinoti and his gang now think they'll be able to reach 300,000 individual investors willing to pay $9.95 per month for the same service they've been selling to the institutions for $1,850 per year. And even if the institutions all cancel their subscriptions and migrate to the Web for the cheaper $9.95-per-month deal, what does Valinoti care? At $9.95 per month, 300,000 subscriptions works out to $35.8 million a year, which is 35 times better than what he's doing now.
And at the current over-the-moon multiples of 30 and 40 times revenues that Internet stocks are selling for, this company could easily wind up fetching a $1.4 billion market multiple, which is to say 116 per share. Numbers like that are nutty, I know, but the whole market is nutty.
The question, of course, is whether the brokerage firms are going to stand by idly and watch Jagnotes.com use the mass-marketing clout of the Web to pick up what could easily turn into some real folding stuff -- especially when it will be pocketing it by sucking the market-moving value out of Wall Street's own research before the clients who pay for it ever get the benefit.
Right now, the firms are talking tough. "That's our research," said an official at
. "And the reason it has value to Jagnotes is only because we created it. So what makes them think they can sell it just because they got hold of it?"
The brokerage firms have a point. The only reason a publicity photograph of
has value is because it is not a photograph of
. But just because Heather can pose with the greatest come-hither look of all time does not mean you can run off 10,000 copies of her best photo and start selling them on the sidewalk in front of the Port Authority. As a First Amendment lawyer acquaintance of mine put it the other day, "You can't reap what you did not sow."
Yet that certainly seems to be what is going on here. After all, the individual morning-call reports that Jagnotes is collecting and then selling have no research value added to them by Jagnotes itself. Rather, the information is valuable to subscribers solely because it represents the work-product of presumably savvy investment firms like
. What's more, the firms all go to great lengths to keep their research proprietary during the early morning hours when it is freshest.
Example? Some 82 different Wall Street investment and brokerage firms exclusively use a Boston subsidiary of
Thomson Financial Services
-- to distribute copies of their morning call reports to specified institutional clients. All stipulate in contracts with First Call that the information is to be treated as proprietary and not to be released generally to the public without the firm's approval.
The brokerage firms also gripe that, on occasion, Jagnotes misstates their recommendations. Said my source at Lehman Brothers, who not so long ago held a top position at
, "That Jagnotes thing would drive us crazy. I'd come to work in the morning and find a dozen messages from callers wanting to know why we'd downgraded
, for example, when we'd actually upgraded it."
Such errors seem to continue to this day. A random check of Jagnotes.com's Web site report on Lehman Brothers for April 1 showed the following: a claimed upgrade for a company with the trading symbol CBC and a predicted target price of 60. Yet CBC turns out to be a company named
, which was already trading at 59-plus and which Lehman does not follow. The actual Lehman recommendation was for
, the telecommunications giant, which is currently trading around 50 and which the Lehman analyst thinks will go to 60.
But don't make the mistake of thinking this whole thing is a who-cares issue. Valinoti said he has a legal opinion from
to the effect that Jagnotes has a perfect right to sell the information since it is public by the time Jagnotes gets it. Though the company naturally won't identify its sources, it seems reasonable to assume that the snitches mostly amount to clients of the brokerage firms, which is to say individuals who are not covered by work-product and confidentiality agreements.
Nonetheless, if the major Wall Street firms don't challenge what Jagnotes is doing, they will be simply inviting the company to press ahead. And with a hot stock price and the distribution reach of the Web behind it, the company will obviously be able to improve the look, feel and impact of its operation greatly. It is thus not farfetched to foresee a situation in relatively short order when Valinoti and his boys will be able to put out a high-quality, up-to-the-minute tip sheet on what Wall Street's brokerage firms are telling their clients 24 hours a day, thereby totally undermining the point of telling them anything in the first place.
On the other hand, watching the major firms of Wall Street go into court would be a spectacle to behold. They would after all be arguing, in effect, that they somehow have a right -- which takes precedence over the First Amendment -- to control the flow of their research into public hands in a way that simultaneously manipulates stock prices in the market.
A closing thought on Dan Dorfman: It's only my personal opinion, mind you, but I think the guy got a very raw deal. Back in the early 1990s, he was easily the most influential financial writer in America, with a must-read daily column in
, followed by an equally high-profile column in
magazine and a must-see market-hours slot on
. Then he got swept up in a stock-fraud probe run out of the
office in Brooklyn. And though he was never charged with anything, he was fired by
, suffered a stroke and his contract with
expired. Now he's apparently going to be writing a column again, this time for the Jagnotes.com crowd.
So whatever happens with Jagnotes itself, I personally wish Dan Dorfman luck. He got totally screwed by a bunch of spineless corporate suits who turned on him in order to look tough when they could have looked much tougher (and done the right thing) by standing behind him instead. In the process, they nearly destroyed his career. Now it seems he's caught a break, and I for one say he deserves it -- big time.
Christopher Byron's column appears in the New York Observer, and he also writes a Wall Street and investing column for Playboy. He is the former assistant managing editor for Forbes, the Wall Street correspondent for Time and the Bottom Line columnist for New York. Byron holds no positions in any of the stocks discussed in his column. While he cannot provide investment advice or recommendations, he welcomes your feedback at