Copyright 2001 The Washington Post
The Washington PostMarch 19, 2001 Monday
Final Edition
SECTION: FINANCIAL; HEARSAY THE LAWYER'S COLUMN; Pg. E01

LENGTH: 2025 words

HEADLINE: After Securities Law Lesson, a Stock-Picker Returns

BYLINE: James V. Grimaldi, Washington Post Staff Writer

BODY:


A year ago, when the Securities and Exchange Commission accused Georgetown University law student Douglas W. Colt of a price-manipulation scheme through his stock-picking Internet site, his future might have seemed gloomy. He made national news, and SEC officials pointed to the case as an example of their crackdown on Internet-related stock fraud.

However, things haven't turned out so badly for Colt, after all.

First, the SEC didn't impose a potentially steep fine because Colt and the others said they didn't have the money. Second, despite the gravity of the case, Georgetown had no problem giving Colt his law degree last year. Finally, the California Bar Association gave him a license to practice law.

"Once they were presented with all the facts," Colt said of Georgetown and the California bar, "it was a nonissue."

Colt, now 25, has a new venture. He and three partners have created a new stock-picking Internet site that has many of the elements of the old Web site. But this time, Colt said, he has taken precautions to stay within the law. For example, he plans to make it very clear when he's investing in a stock his site is pumping.

"My experience with the SEC was the most phenomenal experience of my life," Colt said. "I don't think anyone can begin to understand the educational value of that experience. Taking what I had learned from the SEC, I was able to assist and build a fantastic new Web site and bring a perspective to the company that is rare."

That education began a couple of years ago, when Colt was running a Web site called Fast-Trades.com. He persuaded many of the 9,000 visitors to the site to buy the stocks he picked. Colt, his mother and three law-school buddies made $ 345,000 after his stock picks caused prices to surge.

The SEC accused Colt, his mother, Joanne Colt -- then a city council member in Colorado Springs -- and the three buddies of violating securities laws. The five settled the charges without denying or admitting wrongdoing.

According to stock regulators, Colt targeted cheap, lightly traded stocks with prices that were prone to wide swings during buying and selling sprees. Colt and the others bought shares of companies they had selected and then placed orders to sell shares when stock prices hit a target level, the SEC said.

Colt would then send out his recommendation to nonpaying subscribers, who promptly began buying shares. That quickly caused the stock's price to surge, sometimes as much as 700 percent, according to the SEC. A few hours later, Colt and his associates dumped their shares, and the price soon plummeted.

To generate volume, Colt got the three friends to help him by using aliases and posting "false and misleading" messages on Internet boards, the SEC said. They visited message boards such as those on the Yahoo and Raging Bull sites, where they touted Fast-Trades.com's stock-picking prowess, according to the SEC.

To bolster their case, the SEC quoted from a posting Colt made on another Web site. He posted what regulators called an 11-point blueprint for price manipulation. His points included:

* "Tell your idiot subscribers about how great the stock is, and like sheep, they will run out and buy it."

* "Dump the shares you bought a few hours ago to all these suckers."

* "Laugh all the way to the bank."

After the scheme became public, Georgetown was mum about whether the law students would be disciplined. "This incident distresses our entire community," the university said in a statement at the time.

Georgetown's honor code requires students "to conduct themselves with the highest degree of honesty, integrity and trustworthiness. Doubts about the propriety of particular conduct should be resolved in favor of avoiding even the appearance of impropriety. Each matriculating student is held to have notice of the high standard of conduct demanded by" the law school.

The code states that misconduct off campus does not get students off the hook.

So what happened? Colt, Kenneth W. Terrell III and Jason Wyckoff graduated with the rest of their Georgetown class last spring. Adam Altman had already graduated.

Why didn't they face punishment? Law school Dean Judith Areen didn't return Hearsay's phone calls, but a month after the charges were made public, she wrote about the matter in a letter to a Georgetown adjunct faculty member, who had complained about the lack of discipline.

"It is important to understand that at this point in time the students have not admitted that any of the allegations are true," Areen wrote after the charges had been settled. "It is important, therefore, to avoid a rush to judgment."

Adjunct faculty member Ric Edelman, who complained to Areen, said he is outraged and has quit his teaching job in protest. "I find it astonishing that the university doesn't feel they have any responsibility in this matter," said Edelman, an investment adviser who taught a continuing education class.

A spokeswoman for the university, Karen Sibert, countered that the students would face the scrutiny of the bar association. Apparently, however, that scrutiny did not prevent Colt from becoming a member of the bar.

SEC officials declined to comment, and John Reed Stark, the agency's Internet enforcement chief, was even more wary of speaking; Stark teaches a course on securities law and the Internet at Georgetown.

Colt's new Web site, InvestmentSavant.com, was incorporated as part of InterSavant Inc. last May. Colt is the Web-site designer and programmer of the software that picks the stocks of the month.

Like Fast-Trades.com, InvestmentSavant.com offers its members exclusive stock picks. "Every month, InvestmentSavant publishes its exclusive new Stock of the Month," the site says. "Our past Stock of the Month has gained over 90% since profiled for members. Remember, only registered members received this new profile BEFORE it was made available to the public."

The company's disclosure statement also offers this caution: "Companies profiled by InvestmentSavant pay consideration to InterSavant in either cash, stock or both, in exchange for the electronic dissemination of information which InvestmentSavant provides through its Web site."

Furthermore, the site advises that InterSavant might buy stock on its own profiled company. But Colt said that holdings in touted stocks will be disclosed and the stocks will be held for at least 48 hours. Also, penny stocks and stocks with low average daily volume trading are excluded.

When the site converts to a pay-only site, Colt said, the company will not invest in any of the three or four stocks a day that are promoted.

"We have done everything possible to ensure that the current Web site goes far far beyond the requirements that the SEC has in place," Colt said.

The site also offers colorful commentary on the SEC, calling former chairman Arthur Levitt's tenure as one with "an ironic dichotomy." In an article titled "Farewell to the Chief," InvestmentSavant wrote, "Perhaps it lays with his personal philosophy that investors are best viewed as victims or perhaps the conflict rests with the commission's 1998 appointment of Richard Walker as head of the enforcement division. Mr. Walker's confrontation style stands out in sharp contrast to the more thoughtful, seasoned approach of his predecessor, William McLucas."

Contrast, indeed. It was Walker who brought charges against Colt. And who defended Colt when he was confronted with SEC allegations? None other than McLucas, of Wilmer, Cutler & Pickering.

And there is the commentary about the SEC's recent crackdown on TnTstock.com, an operation somewhat like Fast-Trades.com.

"There is nothing wrong with purchasing a security, providing others with truthful information about the security in the hope that the price will increase, and then selling your holdings if the price does indeed rise," InvestmentSavant writes. "Consider the ridiculousness if this were not the law."

Adds the site: "The truth is, the SEC despises active investors who create market volatility."

So what is Colt doing with his law degree? After the SEC filed charges against him, Gibson, Dunn & Crutcher, which had offered him a first-year associate's job at $ 125,000 a year, persuaded Colt to withdraw his acceptance. "Once you say you have this action filed against you by the SEC, it sort of is a negative at most law firms," said Colt's attorney, Tony Graham, of Irvine, Calif.

His loss of the job at Gibson, Dunn was cited in a legal document Colt helped produce: a lawsuit. Colt and his mother are suing the publisher of his hometown newspaper, the Colorado Springs Gazette, for its coverage of the SEC case. They say the paper libeled him, costing him his job at Gibson, Dunn and his mother her spot on the city council.

Researcher Richard S. Drezen contributed to this column.

Hearsay pumps and dumps every other week in Washington Business. Send your stock tips to hearsay@washpost.com.

LOAD-DATE: March 19, 2001