Investigate The Investors

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The witch hunt goes on, as burned investors and their designated protectors assign blame for the Internet bubble. Last week fresh testimony in Washington detailed the sordid ways some analysts conduct business, and more high-profile lawsuits surfaced--some naming bubble queen Mary Meeker at Morgan Stanley. There's enough indignation coursing from Main Street to Wall Street to K Street to keep the bar at full employment for decades.

The cause of all the whining is the horrendous beating investors took in tech stocks that, truth be known, most of them should never have owned. Curiously, almost no one lays blame at the feet of those who bought the puffed-up shares of so many unproved companies. So bankers and analysts who concocted and endorsed the IPOs that went poof are taking the heat, as are regulators, whose thumb wasn't nearly big enough to squash some obscene practices--like analysts personally selling shares that they rated a "buy." Another dirty trick: loading up on pre-IPO shares and then slapping on a "buy" rating when the stock starts trading.

Laura Unger, acting chairwoman of the Securities and Exchange Commission, cited such conflicts of interest during the congressional hearings. Another conflict--rating a stock a "buy" in order to win investment-banking business--resurfaced as an allegation in a suit naming six major brokerage firms and in two other suits naming Morgan Stanley and Meeker. These come on the heels of a similar case settled last month against Henry Blodget and Merrill Lynch. Merrill denied wrongdoing. Morgan says the "allegations are unfair and inaccurate and cannot be supported in court."

Perhaps so. Still, as I've said before, analysts are more conflicted than a Woody Allen character. That must be fixed. But to focus on them is to gloss over guilt that investors must share, guilt that frightfully few want to accept. So in the spirit of hunting down demons, I call upon government to fund immediately a Department of Pathetic Investors and have DOPI look into the methods and motivations of those who eagerly plunked down their savings for the likes of VA Linux and iVillage. I'm confident that the inquiry would produce damning evidence of investors' blatant greed, deceit, blind lust for wealth, sorry ethics and outright fraud. In other words, they were no better behaved than the analysts and bankers.

Let's start with simple abuses, like letting the credit-card bills pile up while pumping as much as possible into CMGI, or tapping the home-equity line to stuff cash into the Munder Net Net fund. In essence, you charged those investments, laying out up to 18% annual interest on the bet that stocks would go up faster. That's blind lust for wealth.

Some of my favorite stories are about individuals who rekindled the fire with an old flame who happened to be an Internet executive, just long enough to get put on the "friends and family" list for IPO shares. Talk about deceit. In that vein, what about husbands and wives who never confided the risks they were taking with big bets on a stock like Rhythms NetConnections?

In many cases, investors with large accounts at one brokerage seduced brokers at other firms by saying they would switch if they could just get a decent slice of, say,'s IPO. Brokers who bit often found the big account never came their way. Sometimes the prospect didn't even have the money--only a forged statement of assets. I'd call that unethical, at the least.

Blatant greed? How about employees who exercised stock options but didn't sell the stock in an attempt to get a lower tax rate by holding for one year, or those who did sell but left the money they would need for taxes in the market to try to make another killing first? If the stock hadn't tanked in the meantime, things might have worked out just fine. And lots of folks had gains of more than $1 million at the peak but never sold a lick, riding the burst bubble into the ground.

As for fraud, you can find that written all over the "suitability" and "qualified investor" forms people faxed in when they opened accounts to buy IPOs and even tougher-to-get private placements. In estimating their net worth, it seems, some forgot to subtract their mortgage balance from the value of their home and somehow judged that the car had appreciated. More critically, when they described themselves as aggressive, well, they certainly didn't mean they could absorb big losses without vomiting. No, what that meant was, Let me in on the easy money too.

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