Chat-Room Guru's Stature Drops With the Technology Sector

In the Arthurian legend, Merlin was an enigmatic figure, an enchanter and
seer who advised King Arthur — but a wizard with a demonic side as well.

In the modern-day Internet lives another enigma who calls himself Merlin. A
Scotsman whose real name is Chris Rea, this Merlin has spent the last two
years prophesying the moves of stocks in Trading-places.net, a popular chat
room. From his homes in Niles, Ill., a Chicago suburb, and Marco Island,
Fla., Mr. Rea has beguiled hundreds of investors with his electronically
transmitted claims of stock-picking prowess. At the height of his
popularity, the subscribers-only chat room had about 300 paying members,
making it one of the hottest such sites on the Web.

But the Internet Merlin today finds his magic waning. With the Nasdaq
composite index down 18.5 percent this year and many of the highflying
stocks favored by chat room denizens in flames, Web sites like his — which
sprang up by the dozens as technology stocks boomed — are not the hangouts
they once were.

And their participants are not so forgiving. Details of Mr. Rea's
operation, disclosed by former employees and customers and confirmed by
other knowledgeable people, illustrate how perilous it is for investors to
log onto the Internet and trade shares based on information they glean from
chat room advisers they know nothing about.

Documents supplied by these people and conversations with them reveal an
operation built on the kind of artifice that the Internet makes so easy.
Mr. Rea has misrepresented his own past and misled customers about the
identity of at least one of his site's moderators — employees who, like Mr.
Rea, make recommendations to buy and sell stocks.

He has populated his site with "ghosts," traders who wax enthusiastic about
the money they have made on Mr. Rea's calls but who insiders say can be
tracked electronically to Mr. Rea himself.

And, former colleagues and customers say, Mr. Rea has taken advantage of
his true believers to advance his own financial interests.

In an interview on Friday, Mr. Rea denied those accusations and said: "The
bottom line is, we call stocks on an hourly, minute-to-minute basis, and
our only intention is to offer an advantage and opportunity for our members
to make money. That is what we strive for and live for. If you have people
investing in stocks and they don't like the way it has gone, it is very
easy for them to point the finger."

For more than a year, Mr. Rea has been under investigation by the
Securities and Exchange Commission. Although Mr. Rea says the inquiry has
ended, he has acknowledged that the S.E.C. was looking at his relationship
with some of the brokers whose services he recommends on his site. Mr. Rea
declined to say how many members he has now, but former employees say the
number has declined to 50 or so.

Some members who quit recently said they did so out of frustration, with
significant losses sustained as they followed Mr. Rea's advice. As
membership dwindles, Merlin's ability to propel stocks on the wings of an
e-mail message has weakened, too.

Mr. Rea is not the only chat-room operator to draw the attention of
securities regulators. Of the many cases accusing traders of using the Web
to generate illicit profits, perhaps the highest-profile one was the
S.E.C.'s suit last January against Yun Soo Oh Park, better known as Tokyo
Joe. The commission said Mr. Park had operated a classic pump- and-dump
scheme, buying shares of stocks that he would then recommend to
participants in his chat room. As they rushed to buy, Mr. Park would sell,
the regulators said.

Mr. Park is contesting the accusations.

Still, the inner workings of an investing chat room like Trading- places
are not well known to investors. And to this day, much about Mr. Rea and
Trading-places remains shrouded in mystery; even the picture of Mr. Rea
that once appeared on the Web site has vanished.

The mist is clearing from many customers' eyes, however.

"I thought I was going to be part of an amazing team of professional
traders led by a man named Merlin who was a magic man at reading stocks,"
said Alfie Shamroth, 45, of New York City, who was a Trading- places
subscriber from March 1999 until July of this year. "I ended up finding
there is no magic to picking stocks, and I found out that I was absolutely,
100 percent on my own."

Mr. Shamroth, who described his losses as "well into six figures," said he
considered them "an entry fee for learning the game" and says he still
actively trades stocks.



A Few Embellishments

Christopher James Rea was born in September 1953 in Scotland, but he has
lived in the United States since at least 1990. Last year, when he was
trying to sign up investors in a Web auction site he hoped to start, Mr.
Rea stated in a private placement memorandum that he had earned a degree in
psychology from the University of Dundee. But officials at the university
said they had no record of Mr. Rea's attendance, and Mr. Rea acknowledged
Friday that the claim was inaccurate.

"That information is erroneous," he said, "and I'm trying very hard to
recollect how that was in there."

At varying times, Mr. Rea has told people that he introduced cellular
telephone technology to Britain, or that he was a designer of sophisticated
computer software, or that he was a professional securities trader in
London before he came to the United States. Mr. Rea now says he was never
registered as a trader.

Hyperbole aside, his life would become more mundane before he started
Trading-places. In 1995, he and his wife, Julia, had a home-based company
called Automail that produced mailers for automobile dealerships. Automail
and the Reas were sued early that year by a California company that accused
them of infringing on its copyrights by reproducing an Acura mailer. Mr.
Rea said that while he recalled there being an out-of-court settlement in
the matter, he would not provide details.

In 1997, he started Trading-places , according to a description of the
company on the Web site.

As day trading grew in popularity along with the Internet, Mr. Rea and
Trading-places gained a following. By the late fall of 1998, when the
financial markets were still recovering from Russia's default on its debt
and the near collapse of the Long Term Capital Management hedge fund,
Trading-places had attracted about 30 traders. According to one of them,
Mr. Rea made good stock picks, and his customers made money. During those
months, Mr. Rea issued buy or sell alerts on about 10 companies daily.

As 1999 began, day traders across the nation found themselves aboard a
Nasdaq rocket ship that would soar beyond any of their wildest dreams.
Technology stocks, favorites of active traders because of their huge moves
during a single trading day, became an almost easy path to profit.

As Trading-places's membership grew, so did Mr. Rea's ability to move stock
prices. In early February 1999, for example, he recommended shares of two
discount brokerage firms, J. B. Oxford Holdings and Siebert Financial. His
throng of followers, by then more than 100, helped to push Siebert from
$19.13 to $49.50 in two days and to propel Oxford from $12 to $25.75 in one
session. Articles about Mr. Rea and his chat room quickly followed in The
New York Times and The Wall Street Journal. Even though these articles were
skeptical of Mr. Rea, Trading- places attracted crowds of new traders.

About this time, former colleagues and customers say, Mr. Rea began to
change his modus operandi. Instead of making just a few calls on stocks, he
began issuing alerts on as many as 30 companies a day, advising his
customers to buy and sell much more often than he had earlier.

Olivier Asser of Odenton, Md., a former Trading-places moderator, said he
believed that the increasingly frenzied stock recommendations related to
deals Mr. Rea struck with brokerage firms to pay Trading- places for
generating trades.

Payment for customer orders is common among brokerage firms. But the
Securities and Exchange Commission requires such deals to be disclosed to
customers, and the National Association of Securities Dealers prohibits the
payment of such referral fees to unregistered individuals or entities like
chat rooms.

To support his assertion, Mr. Asser points to two e-mail messages from
Trading-places to brokerage firms discussing the terms of such deals. One
message, written last May to an electronic brokerage firm specializing in
futures, says that Trading- places will be paid $6 for each round- trip
trade — trades getting in and out of a position — by a client referred by
the Web site. The other e-mail message, to another futures broker,
confirmed discussions with Trading- places about the Web site receiving $5
per round-trip trade by a Trading- places participant.

Mr. Rea said the arrangements were never consummated. If they had been, he
said, Trading-places would have registered to operate as a so-called
introducing broker, making the payments legitimate. All other payments he
receives from brokerage firms are for advertising on his site, Mr. Rea said.

One of those firms, CyberCorp, a subsidiary of the Charles Schwab
Corporation, said late Friday that it was reviewing its relationship with
Trading-places.

Both Mr. Asser and Chris Curran, 34, a moderator at Trading-places for nine
months ending in July, said there were numerous "ghosts" in the
Trading-Places chat room — fictitious characters that made it seem as if
Mr. Rea's following was larger than it actually was and guaranteed a
cheering section for his recommendations. When paying customers left the
site, the former employees said, Mr. Rea sent his own messages using their
names.

Ghosts on the site, these people say, carry nicknames like Warlock, Wizard,
Nimrod, Viper, Stoned and Roxy. They could be seen as such because
computer-wise users of the Web site could determine the Web addresses and
server locations from which writers sent their postings, according to
former employees and members. "In too many instances," it was the same
location coming up," one former member recalled. "It was an effort to
deceive the members that there was a strong trading team with all their
fingers on the pulse of the stock market."

When asked on Friday if Warlock, Wizard and the others were people other
than himself, Mr. Rea said, "I think they're real people." But he declined
to put a reporter in touch with them, saying, "Several of those names are
not interested in speaking to you."

On at least one occasion, Mr. Rea gave a newly hired moderator the nickname
of a former moderator, leading members to believe that one of the site's
most popular and respected traders had returned to Trading-Places.

Last March, in hiring Mr. Asser, Mr. Rea asked him to adopt the nickname of
a former trader, Skibum. In an e-mail message to Mr. Asser confirming his
employment contract, Mr. Rea said: "Under no circumstances will you allow
anyone at Trading Places know the `real identity' of the nickname `skibum.'
This is to protect the integrity and high regard many traders have for this
nickname."

Mr. Rea said that he used the old nickname for Mr. Asser because he could
not change his software.

Mr. Asser said he agreed to the ruse to get the job, which paid $2,500 a
month. But he said he quickly clashed with Mr. Rea on stock and market
calls and left the chat room on June 27. He has since become a vocal critic
of Mr. Rea, telling his story to regulators and posting criticisms of
Trading-places practices on other investing Web sites, like Silicon Investor.

"Many T-P traders have been wiped out," said Mr. Asser, who, like Mr.
Curran, has gone on to form an investing Web site of his own. "They are
real people with real hopes and dreams and families to support."

The question of whether Mr. Rea was trading ahead of his customers, as the
S.E.C. asserts Tokyo Joe did, has also hung over the Trading- places site.
In a July message to his members, Mr. Rea said, "Neither Julia or myself or
T-P for that matter has traded one single stock since our inception."

But there is reason to doubt Mr. Rea's claims. In an Oct. 20, 1998, lawsuit
against the Zapata Corporation, an obscure Texas company that produced fish
byproducts before announcing plans that summer to become an Internet
incubator, Mr. Rea said he had purchased 16,700 shares of Zapata in August
and September 1998 — while he was running Trading-places.

At first, Mr. Rea said he did not recall the Zapata lawsuit. Then he added:
"I do remember there were some attorneys who contacted me. What I
understood they wanted to know was how many shares we owned." He said he
had bought the stock well before Trading-places began operating.

But court documents show that he bought 5,700 shares after the
Trading-places.net site started on Sept. 14, 1998.

This summer, Mr. Rea put a new disclaimer on his site. "Merlin does not
trade but affiliates of Trading- Places.net may have a position or effect
transactions in the securities described in our real time trading desk," it
said.

Mr. Rea said he posted the warning because he could not control his
moderators. "I had no choice," he said. "It's very hard to know what your
moderators are doing. I do not trade myself, under no circumstances."

Using the Hard Sell

The episode that hurt Trading- places members most, the former employees
and customers said, involved Mr. Rea's breathless and incessant
recommendations early last February of RMI.Net, a little-known Denver
company that provides Internet access and e-business applications.

The story began unfolding last December, when Mr. Rea told Trading- places
participants that he was starting an Internet auction site to compete with
eBay. He and his wife needed financing for the start-up, to be called
realtimebids.com, and were looking for 10 investors willing to put up
$100,000 each.

"He said it would be the next big thing to hit the Internet," Mr. Curran said.

In the private placement memorandum summarizing the business plan, Mr. Rea
said the Web site's infrastructure would be hosted by AIS Network of
Schaumburg, Ill. About two weeks later, on Dec. 28, RMI.Net announced its
acquisition of AIS, in a transaction worth $3.7 million. RMI issued 426,000
shares of its stock to buy AIS.

Mr. Rea recalled recommending RMI stock at around $7, where it was trading
at the beginning of February, and predicting that it would rise to $90.

News of Mr. Rea's pick made it onto the RMI.Net thread on Yahoo. "RMII
upgraded yesterday by Trading-places with a $90 target price," one person
posted on Feb. 8, using the stock's ticker symbol. "Buy now before big
move!!!!"

The next day, another Yahoo user posted this message: "RMI target of $90 is
no joke. Trading places has an over 90% rate of being at or higher than
target stock prices."

On the strength of Mr. Rea's table- pounding buy recommendation, RMI.Net
shares rocketed to $12.50 on Feb. 11 and even higher the next trading day,
Feb. 14. Then the stock began to fall, but Mr. Rea remained enthusiastic,
reiterating his optimism even in early June, with the stock at around $3.
The stock closed on Friday at $1.09.

Many Trading-places members say that they did not realize — and that Mr.
Rea did not point out — that two large shareholders of RMI.Net had filed
with the S.E.C. to sell 3.5 million shares of its stock on Jan. 21, 2000.
The shares became free to trade in mid-April.

In July, when Mr. Asser posted that S.E.C. notice on Yahoo and Silicon
Investor, Trading-places members sent him e-mail messages saying that they
felt angry and betrayed at being advised to buy RMI.Net shares as company
shareholders were filing to sell. "I know one person who lost a quarter of
a million dollars in RMII alone," one former Trading-places member said.
"It was a disaster."

Mr. Rea said he had no ulterior motive in recommending RMI.Net shares,
explaining that he believed that the company had promise. But Mr. Curran
said Mr. Rea told him he had declined an offer from RMI.Net to buy
Trading-places for $12 million.

Douglas Hanson, chief executive of RMI.Net, said he was introduced to Mr.
Rea by an AIS executive but had talked to him only briefly. "He had
indicated at that time that he had a prospectus out on the street for a
business," Mr. Hanson recalled. But, he added, "there is no a relationship
between us."

Still Manning His Posts

Though he is under fire from former employees, and though his following
appears to have shrunk, Mr. Rea remains at his cyberpost, calling stocks
with ever greater frequency. Last Monday, he issued buy and short-sale
recommendations on 30 stocks before the market opened, giving his
characteristic call to arms: "Let's Rumble the Wall Street Jungle!"

But as one person at the site noted, the reaction was distinctly muted. Few
other traders chimed in.

For Merlin, the Internet Camelot was no longer so congenial a spot.

By GRETCHEN MORGENSON
Copyright 2000 The New York Times Company
http://www.nytimes.com/2000/10/15/technology/15TRAD.html

janet paterson
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