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Re: PENNIEStoSTACKS post# 8934

Monday, 12/19/2005 10:34:38 PM

Monday, December 19, 2005 10:34:38 PM

Pink Sheets Aims For
Respectability Under Ex-Trader

http://online.wsj.com/article/SB113478140128425354.html

Stock-Quotation Service Hopes
To Separate Good From Bad

By IANTHE JEANNE DUGAN
Staff Reporter of THE WALL STREET JOURNAL
December 17, 2005

NEW YORK -- Cromwell Coulson calls Pink Sheets the "Las Vegas" of Wall Street.

He should know.

Over the years, the former Wall Street trader made hundreds of bets on companies quoted on the Pink Sheets -- an unregulated forum for the stocks of companies too small, sparsely traded or troubled to be listed on the major markets. Refco Inc.'s stock price, for example, is now quoted on the Pink Sheets, after the commodities-trading firm was kicked off the New York Stock Exchange.

In the late 1990s, Mr. Coulson made his biggest Pink Sheets bet ever -- he bought the place. Now, nearly a century after the stock-quotation service was formed, the 39-year-old executive is leading its first real overhaul, using technology to try to start separating the most promising companies from what he calls "the dark and dodgy."

The makeover of the company, Pink Sheets LLC, has ramifications for the way tiny companies raise money. With new regulations making it harder for small businesses to get attention from Wall Street firms, entrepreneurs are resorting to the Pink Sheets. Since 2003, the amount of stock traded on the Pink Sheets has more than doubled to $50 billion annually. But honest businesses are mingled with murky enterprises, which have proliferated as the Internet allows bogus information to spread quickly and small investors to trade for themselves.

"A lot of people think of Pink Sheets as a pejorative term," says Gerald Laporte, chief of the office of small-business policy at the Securities and Exchange Commission. "That's not good for that market. We need to clean up the Pink Sheets so that small companies have a trading platform that is more viable. Cromwell Coulson is taking the Pink Sheets in the right direction."

When Mr. Coulson bought the company with some other investors in 1997, it had barely changed for decades. Then known as National Quotation Bureau Inc., it kept track of prices for thousands of stocks in otherwise unlisted companies using an archaic system that distributed prices on pink-colored sheets of paper. To make a trade, brokers had to phone each other.

Mr. Coulson changed the formal name of the company, to its current Pink Sheets LLC. He put the quotes online and installed "Pink Link," a glorified email service that lets buyers and sellers communicate electronically. He moved his 35 employees into the lower Manhattan loft of a failed Internet company and painted the walls pink. He began sending Wall Street honchos pink doughnuts and cannolis with pink filling. [He’s either a brilliant businessman or he’s off his head!]

Now comes the hard part: trying to distinguish the good from the bad. This spring Mr. Coulson will begin building an elite list of issuers that report more information than legally required.

"Cromwell is doing a lot to clean it up," says Denise Crawford, Texas State Securities Commissioner, who has tapped Mr. Coulson for help in some investigations. "But because it lacks regulatory oversight, investors are suffering. It's the Wild, Wild West."

The changes at Pink Sheets are so dramatic that an SEC official says the agency is monitoring its progress to make sure it doesn't accidentally become a stock market.

As it stands, the Pink Sheets is essentially a publishing company. Big investors known as "market makers," such as Knight Securities, pay Pink Sheets to list their bids and offers for their inventory of "over the counter" stocks -- those that aren't traded on national markets like the NYSE or Nasdaq Stock Market. Pink Sheets issuers aren't required to file documents with the SEC, though the market makers and brokers that provide quotes are regulated by the National Association of Securities Dealers.

Pink Sheets now exclusively quotes 4,800 issuers, including several giants that filed for bankruptcy-law protection, including Delta Air Lines. Established foreign companies like Nestlé and Volkswagen [and Roche] also advertise prices of their American depositary receipts on the Pink Sheets. But it is best known as home to obscure firms, like Pinelawn Cemetery, and dormant companies with minuscule revenues and stocks that barely trade.

Earlier this year, the SEC worked with Mr. Coulson to snag companies slipping onto the Pink Sheets through a loophole [a reverse merger] in a rule that allows tiny companies to go public without filing a prospectus. In another incident, the agency foiled an alleged scheme by Michael O'Brien Pickens, the son of famed oilman T. Boone Pickens, accusing him of sending out thousands of faxes touting several Pink Sheets stocks.

Charles Stillman, an attorney for the younger Mr. Pickens, said his client "entered a plea of not guilty and that's where we are," declining to comment further.

Mr. Coulson, a native of Connecticut who graduated from Southern Methodist University in Dallas, was one of the most successful Pink Sheets traders at Carr Securities Corp., where he worked for 10 years, says Walter Carucci, who runs the brokerage firm based in Port Washington, N.Y. "He liked unknown, unloved, unwashed and out-of-favor stocks," Mr. Carucci says. Carr is a part-owner in Pink Sheets.

Running an investment partnership called Cowboy Capitalist on the side, Mr. Coulson earned enough to buy a second home on Shelter Island, where he was known for clambakes with fireworks displays. "Those were my single days," says the newlywed Mr. Coulson, whose wife works at the Metropolitan Museum of Art.

Pink Sheets' roots stretch to 1904 when a Boston publisher named Arthur Elliot began distributing price quotes. In 1913, with a competitor, he formed National Quotation Bureau. More recently owned by a publisher called Commerce Clearinghouse, it resisted technology, leaving a void that was filled by the OTC Bulletin Board, a quotation service operated by Nasdaq.

By the time Mr. Coulson bought the firm, Pink Sheets' quotes dwindled to just 1,500.

Its listings rose and fell with the Internet wave. In 1999, it got an influx of companies when a new NASD rule required financial reports from Bulletin Board companies. It got more newcomers when the Sarbanes-Oxley Act was passed by Congress, requiring more stringent corporate filings.

Among the refugees was Ziegler Cos., a 103-year-old boutique investment bank based in Milwaukee. In late 2003, the firm left the American Stock Exchange for the Pink Sheets because, Chief Executive John J. Mulherin says, Sarbanes-Oxley rules would have cost the company 10% to 15% of its bottom line in the first year alone.

Mr. Coulson won't disclose figures, but says revenue has grown 300% since his purchase. Market makers and brokers pay $6 a month to list a security. They pay $1 a day to trade a security (no matter how many times they trade it). Pink Sheets gets licensing fees for selling its market data and charges for advertising on its Web site.

Now Mr. Coulson is aiming for the first time to charge issuers to disseminate information. For about $6,000 to $10,000, corporations will get templates for financial information, and can use the Web site to post media releases and hold question-and-answer sessions as well as other services. This will help raise them into one of the new tiers.

In the top tier -- "PremierQX" -- will be companies large enough to be on a major exchange, with audited financial reports, annual shareholders meetings and share prices of at least $1. Making the list, Mr. Coulson says, will be akin to becoming an eBay "power seller," a term the auction Web site applies to participants with strong track records.

One tier down will be smaller issuers with audited financial reports. The final group will be small companies with information "prepared by persons with sufficient financial skills," according to a description that Pink Sheets soon will begin mailing to issuers. All still will be listed on the broader Pink Sheets as well.

"I am trying to wade in, pull the good ones out of the drudge and let the drudge get drudgier," Mr. Coulson says.

Mr. Laporte of the SEC has high hopes for the tiering system, and Mr. Mulherin of Ziegler said he would likely sign on. But it remains to be seen whether other issuers jump to join. After all, many are on the Pink Sheets because they don't want to disclose information.

"I'm not sure how the tiering system will pan out," says Nick Ponzio of Hill, Thompson, Magid LP, a large Pink Sheets market-maker. "But what's behind it is his philosophy that the more information that people have, the less fraud can happen."