Stock Picking Marvel Or Just A Slick Operator?

To hear his small army of fans tell it, Rafi M. Khan is more than just a Beverly Hills stockbroker--he is nothing short of a stock market wizard. The son of a Pakistani diplomat, the 43-year-old Khan is quick to tell visitors of his meteoric rise from his days as a pencil-pushing insurance actuary to a high-flying stock-picker. His client list, he has claimed, includes such illustrious names as Salomon Brothers and the Fidelity, Putnam, and Wellington fund groups. And to his satisfied customers, Khan is a genius at picking undervalued stocks. "No one's made me more money than Rafi has," marvels Philip J. Dubuque, a vice-president with Chestnut Hill Management Corp. in Boston.

But his detractors contend that there is another side to Rafi Khan--a dark side. They charge that Khan is nothing more than a slick operative who manipulates markets and trades on inside information. In one of several legal skirmishes involving Khan, U.S. District Court Judge John E. Sprizzo found that Khan "committed willful perjury in this court under oath."

Working from a cramped office on Wilshire Boulevard, Khan waves off these charges, including Sprizzo's. "Why the man had such a hatred for me I'll never figure out," he says. As evidence that Sprizzo's statement has little weight, he pulls out a notebook of brokers he says call him regularly to sample his stock-picking acumen. "They look to me for guidance," says Khan, nonchalantly.

UNUSUAL SWAY. Khan is the most flamboyant of a new breed of swashbuckling stock promoters who are flourishing in the buoyant stock market. He delights in skewering short-sellers who often attack his stock picks. For instance, he is currently embroiled in a series of bitter lawsuits with shorts over Future Communications Inc., a Texas broadcasting and cable company whose stock soared after Khan began boosting it. But unlike most other promoters, he often turns with a vengeance on companies he has promoted when they disappoint him. They often return the favor. He was recently sued by ICN Pharmaceuticals Inc., one of his promotions, after he mounted a stalled takeover coup.

The lawsuits illustrate the unusual sway Khan often holds over some of the thinly traded issues he follows. Khan has been one of Future's biggest boosters. In June, Khan, who owns shares in Future, issued a highly favorable report that helped push its stock to as high as 27 from just 65 8. He maintains that the company is attractive because new cable-television rules will require more cable systems to carry its family-oriented


In the Future suit, shorts allege that Khan and his current employer, Reynolds Kendrick Stratton Inc., manipulated the stock of the Dallas company by placing 2.6 million of its 3.4 million shares with clients and family members. Shorts claim the maneuver required them to pay for 193,676 shares, which they owed clients of RKS, at an artificially high price of 36 a share. At the time, the stock was not trading and the most recent price had been a mere 273 8. Khan denies the shorts' allegations and says he has no control over his clients' holdings. He maintains that massive shorting in the stock created a situation where shorts were unable to cover their positions. "Did anyone ask them to short it?" Khan asks with a laugh.

TONKA FRACAS. Khan can hardly laugh off the suits completely. He concedes that he has been interviewed by a Securities & Exchange Commission investigator about the Future transaction. Khan also concedes that the SEC has been asking questions about trading activity at the now-defunct Chelsea Street Securities Inc., a suburban Dallas firm that was a market maker in a number of stocks, including Future Communications. Reynolds Kendrick Stratton opened a Dallas office in June, hiring most of Chelsea Street's brokers.

Khan's most tenacious adversaries, though, are often companies in which he has taken positions. In 1989, after selling shares in toymaker Tonka Corp. to his institutional clients and then seeing the stock sag, Khan filed suit against the company, charging its executives with misleading investors in a public-offering document about the company's revenue growth. Khan says that suit was filed to protect his clients who had bought Tonka stock. Khan, who owned stock in the company himself, eventually shared in the $5 million that Tonka paid to settle the suit, according to Karl L. Cambronne, a lawyer for the shareholders. Khan has no apologies about going after companies that he once promoted. "My responsibility is to my clients who pay me commissions," he says.

ICN Pharmaceuticals found that out earlier this year. The Costa Mesa (Calif.) drugmaker filed suit against Khan in April, charging that he had obtained inside information that convinced him to try to take control of the company. The suit also said Khan failed to disclose that he had formed a group with a number of disgruntled institutions that intended to depose management. Khan, who had accompanied management on a series of road shows in early 1993 for the stock offering of an ICN subsidiary, told the SEC in April that he would seek to replace the board of ICN Pharmaceuticals with his own slate. In a letter to the SEC the following month, Khan charged that ICN Chairman Milan Panic was grossly overpaid and that ICN board members were "spineless."

"FRAUDULENT CONDUCT." The ICN fight has been bruising for Khan. The controversy led to his resignation in March from H.J. Meyers & Co., where he had been a broker for three years. Then in May, in issuing a preliminary injunction that barred Khan from trying to depose ICN management, U.S. District Court Judge Sprizzo found that Khan's testimony at times was "willfully false" and that he had traded on inside information. Khan says the charges are untrue. An appeals court reversed the injunction but not the finding of perjury. ICN is seeking to have the injunction reinstated and is pressing ahead with its suit against Khan, which seeks damages of $25 million. "There is a pattern of fraudulent conduct and violating U.S. securities laws," alleges Arnold I. Burns, outside counsel for ICN, of Khan's dealings with his client, a charge Khan denies.

Khan received notoriety for making allegations of just that kind against another company in which he owned shares, AmBase Corp. In 1989, he wrote SEC Chairman Richard C. Breeden, alleging possible securities-law violations at the troubled financial-services firm. Eventually, as complaints from institutional investors mounted, the company's management was replaced.

Rafi Khan's history is almost as colorful as his most recent exploits. Born in Pakistan, he was raised in London and graduated from University College there with a degree in mathematics. Finding work as an actuary too dull, he joined Lonhro PLC, the London-based conglomerate, in 1983. He left in 1985, and six months later capitalized on his stint there by issuing a massive report on the company, which he was able to sell to a London investment firm for a hefty sum. Khan says that the report was instrumental in convincing investors such as Michael F. Price, manager of the Mutual Series Fund, and Martin D. Sass, a New York institutional investor, to purchase Lonhro shares. Price could not be reached for comment. Sass says he doesn't recall the report or Khan.

It wasn't until he arrived in the U.S. that Khan's career really took off. After an unsuccessful stint in Dallas as chairman of a water-purification company, Khan decided to become a broker. "I needed to make money," he says. Taking a job with the predecessor to Wedbush Morgan Securities in early 1988, Khan relocated with his wife and three children to Los Angeles. Working the phones relentlessly, he boasts that within one year he went from having no client base to being one of the firm's largest producers. "He's the most aggressive person I've ever met on Wall Street," says one fund manager who was once wooed by Khan.

His pitch was simple. He would fax research reports, rarely longer than a few pages and always in oversize type to catch the eye of a busy fund manager. Early on, he would focus on stocks that he expected to nose-dive and would hustle out faxes ahead of any possible negative news. "Even if I didn't get the commission," he says, "I figured they'd remember that this guy was no fool." But mostly he focused on the upside. He promised to deliver stocks that would not only appreciate but would double or triple in price.

His tactics have attracted many followers. Putnam Cos. and Fidelity Investments, whom he has identified as clients in the ICN court proceedings, decline to comment about Khan. But investment managers at such firms as Glickenhaus & Co. and Chestnut Hill Management praise Khan's ability to find controversial but undervalued stocks. He made a well-timed pick of McDonnell Douglas and was an early backer of insurance company Conseco. These days, Khan is high on mainframe computer maker Encore Computer Corp., whose stock has gone to $4, from 21 2 in June.

INFLATED PRICES? His recommendations also have attracted short-sellers who believe the prices of his picks tend to be inflated. Often, they have been right. Khan was a booster of wireless data transmission company Spectrum Information Technologies Inc. last spring, just before the stock tripled on news of a contract with American Telephone & Telegraph Co. The stock collapsed after questions about the value of the contract, although Khan says he advised his clients before the slide to get out.

Khan also recommended Kentucky Central Life Insurance Co. in early 1992, before it was submarined by problems in its real estate loan portfolio. "If I hear that Rafi is involved, I take a look at the stock to short it," says Jonathan Merriman of Merriman Capital Management, who shorted Kentucky Central. Whether Khan is a stock picker extraordinaire, dangerous malefactor, or merely a crafty but overhyped attention-getter, there's no question that increasing numbers of people seem to be watching his every move. But for Khan, the attention could well become more and more unwelcome.

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