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Beware of all enterprises that require new clothes.-- Thoreau

An Internet "Bounty" to Silence Premier Laser's Harshest Critic?
by Louis Corrigan (RgeSeymour)

Like a character out of Kafka, Steve K. stands accused of a largely unspecified crime he says he didn't commit. And he says his business life has been turned upside down as a result. For the last week, he has also suffered the anxieties of a man with a bounty on his head. His main concern is how to clear his name and squeeze justice from those whom, he believes, have damaged his reputation.

Depending on how it turns out, his story could prove to be a cautionary tale, either for investors who make negative comments about public companies on online message boards or for corporations that might try to prevent such investors from doing so. At the very least, it appears that John Westergaard, of WESTERGAARD ONLINE SYSTEMS (OTC: WSYS), and Westergaard's client PREMIER LASER SYSTEMS (Nasdaq: PLSIA) might end up facing a lawsuit as a result of this online skirmish.

Steve will not reveal his full name, nor even the "K." That comes from certain message board posts that also suggest he lives in the Las Vegas area. But he describes himself as "an Internet trading investor." In a phone interview, he said, "I don't have an employer, haven't had one for a number of years." He frequents the Motley Fool message boards using the screen name "Pluvia1" and the Silicon Investor (SI) message boards under the name "Pluvia." He also posts his online portfolio on America Online's Shark Attack boards. Pluvia, as we'll call him, said he's been involved in the stock market since 1982, as a broker, analyst, market maker, or trader.

"I'm very familiar with a lot of things in the market," he said. "And I've seen a lot of scams. When I come across situations that appear to be hype, I'll let people know about it. I did the exact same thing in a company called Teletek about a year ago."

Indeed, Pluvia was a vocal TELETEK (OTC: TLTK) bear from the time the stock traded around $7 a share until the company all but disintegrated as its top officials were indicted for fraud. The fallout dropped the stock below a buck a share. Then last February, in an unusual attempt to salvage the company, longtime Teletek shareholder and Fool poster Cliff Plaszczewski (screen name "Cliffplas") teamed up with Pluvia to serve on an official Teletek advisory panel designed to help clean house and restore shareholder confidence. At one point, Pluvia's passionate pleading with creditors was literally the only thing keeping the firm out of bankruptcy proceedings that would have left the stock essentially worthless. Yet he quickly found that the situation was far worse than investors could have known. "Some of the numbers in the SEC filings were fraudulent," he said. "I ended up being right on about 99% of what I said with Teletek."

Pluvia's latest target has been Premier Laser Systems, a company that sells ophthalmic lasers and teeth whitening lasers and has recently attracted fervent attention from online investors who think its new Er:YAG dental laser may usher in an era of near pain-free dentistry. In May, the company's Centauri Er:YAG laser became the first ever cleared for marketing by the Food and Drug Administration (FDA) for use on hard tissue, or cavities. As we reported May 29, the decision surprised officials at the American Dental Association and left some dentists skeptical about whether the $40,000 systems would prove versatile enough to be cost-effective. Even some dentists specializing in laser surgery suggested that the FDA clearance was significant mainly for opening up the field to an inevitable rush of competitors, including firms such as AMERICAN DENTAL TECHNOLOGIES (Nasdaq: ADLI) and BIOLASE TECHNOLOGY (Nasdaq: BLTI).

Pluvia became interested in the story, he said, because he has been involved in laser dentistry, purchasing and using teeth whitening lasers sold by ION LASER TECHNOLOGY (AMEX: ILT). At one point, he also had the exclusive rights to supply Ion Laser's equipment and whitening agents in his area. Knowing the business, he was skeptical about the claims Premier was making in its press releases. In numerous posts on the Fool and SI message boards, he charged Premier with exaggerating the number of Er:YAG lasers it was selling or shipping and exaggerating the number of prospective customers attending Premier-sponsored training classes.

For example, Pluvia highlighted a press release of June 2 where Premier CEO Colette Cozean said the company started shipping the first Er:YAG laser in May and expected to ship up to two dozen "this month." Yet in the firm's August 13 press release reporting on the first quarter ended June 30, Cozean said only nine lasers were shipped to customers during the quarter, with seven other systems going to training locations. This discrepancy wasn't merely due to logistical problems.

Pluvia also noted that Premier's May 20 press release discussing the strong interest from dentists following the FDA decision said that the firm had received about 1,200 telephone inquiries and that 10% of all such calls were leading to orders. At roughly $40,000 a system, that would mean the backlog stood at $4.8 million by late May. Yet based on the August 13 report, the backlog for Er:YAG lasers was just $2.6 million on June 30, despite the fact that the nine lasers Premier had shipped to customers amounted to just $360,000 in sales.

Pluvia also said that during one training session in southern California, the laser being used actually failed in the middle of the course. He has also charged that Premier has "a history of failure," including a few joint ventures that the company has had to write-off entirely. Finally, he's questioned the rationale for Premier acquiring EyeSys, a money-losing firm that, in Pluvia's view, seems like a big risk considering its significant historical losses and the added dilution to the value of Premier's shares. Indeed, Pluvia has argued that the EyeSys creditors who are accepting stock in the deal are likely to start dumping Premier shares onto the market as soon as they have it in hand -- or shorting against their positions as soon as they can be sure the deal will close. According to the definitive prospectus, such selling could begin by late September.

Pluvia has taken a lot of heat on the message boards for his comments. Yet nothing could have prepared him for what happened August 20. That's when John Westergaard posted the following message on his Westergaard Online website:

"Westergaard Internet Broadcasting Network (WIBN) posts $5,000 reward for information on 'Steve Pluvia', the Silicon Investor Registered Pen Name of a person, or persons, circulating disinformation designed to drive down the price of Premier Laser Systems (PLSIA) common shares. WIBN ( will pay $5,000 to anyone who provides the most complete dossier on 'Steve Pluvia'. Information should include name, work and home addresses, co-conspirators, names of hedge funds or other parties on whose behalf 'Pluvia' is acting, and any other information relevant to determining the activities and motives of the subject. Dossiers must be submitted to WIBN by noon Wednesday, August 27.... This service is one arm of WIBN which has been designed to continually sweep the Internet to identify parties such as 'Steve Pluvia' engaged in circulating rumors, fraudulent or intentionally misleading investment information or analysis for financial gain, competitive advantage or other purposes. WIBN will be formally launched September 4."

The "bounty" immediately attracted notice on the Fool's Premier message folder on AOL. It also led to hundreds of posts in the last week to SI's "Pluvia vs. Westergaard" thread questioning the motives of each party in the dispute but generally siding with Pluvia. His predicament has inspired endless debate about the role of anonymous screen names in maintaining a poster's privacy and the importance of free speech on the Internet. The SI posters have repeatedly returned to the idea that online communities should be self-policing and that Westergaard was overstepping his bounds by purporting to play moderator. His offer was widely seen as an act of intimidation that, if left unanswered, could have a chilling effect on the kind of freewheeling discussion on online investment boards that allows all sides to be heard. Others suggested that Pluvia or a designate should send in a dossier to claim the prize and donate the money to charity, perhaps a school in Kenya.

As the Securities and Exchange Commission (SEC) has noted, it is against the law for an investor to knowingly post false information about a company on a message board. And last fall, one man peculiarly fixated on spreading misinformation about the management of FONIX (Nasdaq: FONX) had to make a quick and public apology or risk losing his career. Some companies that have charged short-sellers with spreading false information on message boards have sought legal redress of one sort of another. QUIGLEY CORP. (Nasdaq: QGLY) asked the SEC to investigate certain phoney press releases and online posts that company officials thought were part of a conspiracy to undermine its stock. Solv-Ex, the controversial oil extractor (now bankrupt), even sued its short-sellers, with some of the negative posters on the Fool's AOL boards complaining of receiving subpoenas.

Online message boards may appear to offer anonymity. Ultimately, they do not. A public company determined to go after a critic who is spreading lies can go through the proper channels to attain a poster's otherwise confidential information from AOL or a website that requires posters to register, as the Silicon Investor does. It's not easy. AOL will not disclose such information without an order from the Federal District Court for the Eastern District of Virginia, and attaining the court's approval takes time and money. Still, offering a cash bounty to attain such information looks to some online investors like a stunt designed to publicize Westergaard's new WIBN offering. If so, it may have backfired, because Pluvia came out swinging in his early morning post on August 21.

"I stand behind my statements and opinions regarding the company Premier Laser Systems," he wrote. "My statements and opinions are based upon information provided to me by dentists attending Premier Laser’s Dental Drill training classes and in documented phone conversations with employees of Premier Laser Systems, including a lengthy conversation with Premier Laser Systems CEO.... I have never held a long or short position in any of PLSIA’s securities nor worked with others who hoped to gain financially as you have suggested, by anything I posted on the Internet. Your 'Reward' placed on my head, so to speak, is a clear violation of my privacy, and it is has damaged my business. Furthermore, you have clearly slandered me in your comments which have damaged my reputation with my peers."

Pluvia went on to say it seemed that Westergaard had been paid by Premier to promote the company, in part, perhaps, to keep Premier's price up so the firm could "gain millions of dollars through the exercise of their warrants." The fast ramp-up of lasers promised by Premier depended on raising cash to cover manufacturing costs. The firm's recent 10-Q filing makes it clear that of Premier's $25 million in cash and securities at the end of the first quarter, nearly all came from the voluntary exercise of warrants during the last seven weeks of the quarter following the FDA ruling. The $23.7 million generated from the exercise of warrants led to the issuance of over two million Class B (PLSIZ) warrants and 3.34 million shares of Premier's common stock.

At an exercise price of $6.50, Premier's Class A warrants (PLSIW) can be exchanged for one share of common stock plus one Class B warrant. Class B warrants exercise at $8 and are good for one share of common. During the first quarter, there were over 2 million Class A warrants and 1.3 million Class B warrants exercised. That left about half a million Class A warrants and 5 million Class B warrants outstanding as of June 30. The company could redeem these warrants, and thus receive an additional $47 million in cash, if for 30 consecutive days the closing bid for Premier's stock was above $9.10 (for the A warrants) or $11.20 (for the B warrants). In effect, then, Premier paid Westergaard to attack its "toughest cyber critic" because he was endangering the company's capacity to raise much desired capital. That, at least, is Pluvia's view.

Pluvia closed by calling for Westergaard to retract his statements and the reward offering. "Furthermore I demand a printed apology to my liking to be posted no later than the close of business tomorrow EST in your 'Daily Interpreter' website, on the Motley Fool and Silicon Investor Premier Laser stock boards. Any failure to comply with these demands will result in my attempt to remedy through every legal channel available."

Westergaard makes much of the fact that he has been analyzing micro-cap stocks for 40 years and that he has appeared on the PBS show "Wall Street Week," where host Louis Rukeyser called him America's "guru" of smallcap stock investing. Material on the website describes Westergaard Online as "the leading Internet provider of investment research and analysis on investor owned micro-cap companies of less than $300 million market capitalization." What is never said directly is that, one way or another, many of the companies mentioned on the site seem to have paid Westergaard for the attention.

Rather than independent research and analysis, Westergaard and his staff appear to provide something closer to the Web version of an infomercial But without the kind of "paid advertisement" disclosures typically found at the top of print ads that resemble a newspaper or magazine's regular editorial copy, online investors have no way to know whether they're reading analysis that may not be as disinterested as it appears.

Westergaard's principal business seems to be promotions. Until he built up his website site in 1995, much of his work involved sending out profiles of micro-cap companies via his Institutional NETWORK, "a proprietary computer-to-fax digital transmission system," according to the description on his Web page. "Profiles are reviewed regularly with management to consider editorial changes." This fax network reaches up to 12,000 investment professionals and is part of the Westergaard 2000 Series service, which provides quarterly maintenance coverage on up to 300 companies. From this list of companies, Pegasus, described as "a member association of investment professionals organized to develop action oriented investment ideas," then makes investment recommendations.

According to the Web description, "There is no corporate charge for coverage by these published services." In addition, "It is the policy of Mr. Westergaard and the employees of Westergaard Online not to purchase or sell securities recommended in Pegasus." Nonetheless, Westergaard serves as Executor Director of Pegasus, and Westergaard Online's Platinum Select service for corporations "charges registration fees for editorial consultation, Internet monitoring services and for the cost of fax transmission." In addition, the website notes that on occasion, Westergaard Publishing Corporation receives fees for "the introduction of investment banking opportunities to third parties." Sparked by Pluvia's battle, some online investors have taken to calling Westergaard a paid "tout."

For years, Westergaard also has organized investor conferences at New York's Waldorf Astoria hotel. Companies that participate pay Westergaard's firm up to $8,000 for the right to appear. There's considerable overlap between the more than 200 companies that have appeared at these conferences in the last 20 years and the firms highlighted in Westergaard's publications. On the advice of its PR firm Allen & Caron, Premier has appeared at several Westergaard conferences and will be present at the September 4 conference that will launch the WIBN.

The WIBN is essentially a collection of websites, each of which is leased to a public company but owned and ultimately managed by Westergaard. This arrangement, he has said, allows Westergaard to take full responsibility for the content. Appearing to be sites offering an objective presentation of information aggregated from various online sources, these "cyber-stations" will actually offer companies a chance to control their persona by filtering this information, if necessary. Participating companies, such as Premier, are known as "member affiliates," and they pay Westergaard Online $30,000 for the service.

For that sum, Westergaard provides an analyst to compose research reports on the company; $10,000 worth of advertising, either on the Internet or in small ads in Investor's Business Daily; and a service he calls the WBN Cyberpatrol that will sweep a company's stock boards looking for posters spreading "misinformation." As Pluvia says, "This looks like pure paid PR, money that comes from the company to him to make it appear as though it's an independent firm giving them recommendations."

Westergaard, though, sees things differently. He has said that his ethical position is "no different than a Morgan Stanley or Goldman Sachs and other investment banking firms [that] have maintained their reputations for providing respected research on their investment banking clients with whom they have a fiduciary relationship."

Though some "member affiliates" of WIBN are midcap companies, the majority of firms featured at Westergaard conferences and on his Web pages are small, speculative outfits. The stocks of such companies can run up on optimistic earnings forecasts only to plummet when the company fails to meet the lofty expectations. That's happened to a number of firms followed by Westergaard.

For example, in June 1995, Westergaard gave a ringing endorsement to Toronto-based The Instant Publisher, sounding even more upbeat than Richard Geist, a controversial newsletter writer who championed the ill-fated Solv-Ex and was also keen on Instant Publisher. Westergaard compared the firm's printer to the copier that launched Xerox's explosive growth during the 1960s, saying the unprofitable Toronto firm could turn in $2 Candian per share by FY97. Even when he revised his estimates down in October 1995, citing earlier carelessness on his part, Westergaard projected the stock could trade at $70 U.S. a share in a few years, based on his FY98 estimates. Instant Publisher stock doubled to $8 on the positive comments and a move to the Nasdaq from the Toronto exchange. It then collapsed, as it totally failed to meet projections. Instant Publisher became DIVERSINET CORP. (Nasdaq: DVNTF), which now trades at about $1 per share.

Similarly, back on February 12, 1996, Westergaard Online issued an analysis of BIOSAFE INTERNATIONAL (Nasdaq: BSFE), then trading at $3 5/8. He concluded that the firm would soon be generating free cash of $10 a share. "That's got to be a $50 stock in 3-4 years by our book!!!" Unfortunately, after a bounce to the $4 area, the stock continued its long descent to the current quote around $0.40 a share.

The penny stocks Westergaard often highlights can be easily manipulated. Westergaard, however, has often expressed his desire to crack down on those who might attempt such deceptions. In a preview last January of things to come, Westergaard offered a $5,000 reward for information that could help identify whoever sent out a phoney DOCUCON (Nasdaq: DOCU) press release that suggested the firm might have stumbled upon a solution to the Year 2000 computer problem.

The shares of this penny stock briefly jumped to $1.65 per share, only to fall back to the current level of $0.62. Docucon was a veteran of Westergaard's Waldorf conferences. The search for the "perp," as the headline read, included tracking down the owner of the server that had dispatched the news release. Apparently nothing more became of the issue as a search of Westergaard's site offers no mention of anyone ever receiving the $5,000 award.

The difference in the Pluvia case, though, is that Westergaard mentioned Pluvia's screen name and openly charged him with trying to defraud investors. He suggests Pluvia is spreading misinformation about Premier in an attempt to drive down the share price so that either he or his confederates can profit from the drop. Faced with Pluvia's strong response, Westergaard not only did not detail the instances of "misinformation," he started seriously backtracking. In a post to the SI board on Friday, August 22, Westergaard said he would offer a more complete response the following Monday, pointing out at that time "that Pluvia's comments re the company are not fraudulent or even misinformed but they are purposely twisted, however, in a manner that is potentially damaging to investors."

The Monday post retreated further, asserting that "Pluvia's analysis of PLSIA does not involve the purveyance of fraudulent information. He is clearly an informed party." Westergaard goes on to characterize Pluvia's critiques of Premier as "narrowly focused misinformation of what I call the 'Abelson genre,'" referring to Barron's sharp-tongued columnist. He went on to say that in accepting payments from Premier, "WIBN will by definition have a fiduciary relationship with" the company. Yet he assured readers that "neither I nor anyone in our firm or associated with persons in the firm or the firm itself own or have an interest in shares of PLSIA or in any aspect of its business."

Westergaard better hope that's the truth. In the last year, the SEC indicted the publishers of SGA Goldstar, an online investment newsletter, for manipulating stocks and swindling investors. And that was despite the fact that the newsletter had a disclaimer on every page indicating that "Personnel associated with SGA may own shares in the companies mentioned herein or may act as consultants thereto." The SEC has charged that micro-cap companies such as SYSTEMS OF EXCELLENCE (OTC: SEXI) paid SGA in stock to promote their shares. Even as SGA ran glowing "buy" recommendations on a company, the newsletter's principals were selling their shares. Since Westergaard offers hot stock picks that look like unbiased commentary, it seems possible that the SEC might get interested in snooping around the firm's financial arrangements with its clients.

What is Premier's response to the controversy? CEO Cozean did not return phone calls. But Rene Caron, a principal at Premier's PR firm Allen & Caron, said last week, "Premier's position on this is John Westergaard and Westergaard Online are an independent company. Premier Laser has no part in what John Westergaard has put up on the web site relative to this Steve Pluvia." Asked if Premier had paid any compensation, cash or stock, to Westergaard, other than for conference appearances, Caron responded, "None whatsoever. Mr. Westergaard decided to do this independent of Premier Laser and certainly independent of Allen & Caron."

Despite Caron's comments, it seems clear that Premier has paid to appear at several of Westergaard's conferences and is now paying Westergaard $30,000 to participate in the WIBN. One of the services of the WIBN is to sweep the Internet, "identify[ing] parties such as 'Steve Pluvia.'" Thus, it's difficult to see how Premier can claim it is not paying Westergaard to, in effect, harass and intimidate Pluvia through the issuance of this "bounty." Premier shareholders, then, appear to be paying Westergaard to try to silence the company's most vocal critic. The whole thing gives new meaning to the notion of online "hits."

Westergaard has scoffed at people who charge him with violating the privacy rights or reputation of a nom de plume. That's a "pure oxymoron," he has said. Pluvia, though, says the episode has already cost him financially. "I had a $4 million deal that I was putting together that fell apart as the result of this problem. I was doing some venture capital money raising for a company. One of the investors saw this and became concerned and got cold feet. But besides this... I meet a lot of people through the Internet as a result of my success trading stocks, and I do a lot of business with people from those types of introductions. This has undoubtedly hurt my reputation."

Pluvia said he offered Westergaard a chance to apologize and rescind the reward. Neither happened. He also said he offered Cozean a chance to settle the matter out of court but got no response. Now? He's exploring his full legal options, which will begin with libel but likely not stop there. "I'm going after him as hard as I can," he said.

For starters, he's sent in his own dossier on himself, convinced that he's in the best position to claim the reward. The money will go to a charity -- if Westergaard actually pays it.

The Fool's Message Board for Premier Laser Systems

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