Hard Questions For Dan Dorfman

Among stock-market tipsters, CNBC's Dan Dorfman is in a league of his own. His daily three-minute telecasts are must-watch viewing for everyone from Wall Street's most sophisticated traders to enthusiastic amateur investors across the country. When he offers juicy takeover rumors or reports his picks and pans among U.S. companies, share prices frequently jolt up or down.

To serve up his diet of sizzling tips, Dorfman depends on a stable of sources: analysts, stock promoters, short-sellers, and Wall Street dealmakers and stock-pickers. Yet for years, some critics complained about Dorfman's dependence on inside tips, since many of his sources stand to make big money from his power to move markets.

Now, those criticisms have emerged as far more serious allegations. BUSINESS WEEK has learned that the U.S. Attorney for the Eastern District of New York is looking into Dorfman's relationship with Donald Kessler, a West Babylon (N.Y.) stock promoter who is a regular source of tips for Dorfman.

According to sources close to the investigation, both Dorfman and Kessler are under investigation for activities including possible illegal insider trading, wire and mail fraud, and violations of securities laws.

The Brooklyn-based prosecutors are looking into the sometimes hefty payments Kessler allegedly receives in exchange for introducing company managers to Dorfman, as well as whether Kessler in turn compensates Dorfman for mentioning some of his clients.

HUGE FEES. BUSINESS WEEK has turned up no evidence that Dorfman--who also writes a monthly column in Money magazine and until recently wrote a column in USA Today--receives anything from Kessler. But their relationship is at the heart of the U.S. Attorney's inquiry. Dorfman contends his treatment of Kessler is no different from what he would give any other PR person seeking to get a client mentioned favorably on his broadcast. But a six-month BUSINESS WEEK investigation indicates that Kessler used his access to longtime friend Dorfman to earn fees that were large by industry standards. It also suggests that Dorfman commented about companies with doubtful business prospects that were Kessler clients, raising the question of whether his journalistic objectivity was blurred by his friendship and whether investors trading on Dorfman tips may have suffered as a result. Meanwhile, sources at the U.S. Attorney's office say prosecutors are examining unusual trading activity in at least one Kessler-linked company prior to Dorfman broadcasts. One investigator says the office is examining whether Dorfman was used by insiders to inflate the value of their stock and whether he was aware of being used that way. "As we learn more about other Kessler companies, we'll be looking at trading patterns, too," the investigator says.

"FULL CONFIDENCE." Both Dorfman and Kessler say they are unaware of any investigation, and they dismiss the allegations as groundless. "Who cares?" says Dorfman. "I assume the SEC and others are always looking at me." A CNBC spokesman says it has high ethical standards, and "we believe [Dorfman] has observed our standards over the years."

Dorfman denies any suggestion that he takes money or is aware of any insider trading based on his tips. "I would never jeopardize my career and integrity for a fast buck," he says. Adds Kessler: "They can look at my relationship with Dan if they want to. I've never done anything wrong." Frank Lalli, managing editor of Money, says: "I have full confidence in Dan and his integrity as a journalist."

But numerous sources say some companies are willing to pay Kessler handsomely for an audience with CNBC's market mover. After all, a plug from Dorfman can send a company's share price through the roof. These sources say Kessler typically asks for cash payments ranging from $10,000 to $30,000 to set up a meeting. Kessler denies receiving such fees; Dorfman says he doesn't know how much Kessler is paid.

X-RATED VIDEO. Although Dorfman gets ideas from a wide network, sources familiar with Kessler say he is unique: He acts as a gatekeeper, screening many small companies. "That's his calling card. He got us to Dorfman," says Nick Morf, former CEO of Alter Sales Co., a Lighthouse Point (Fla.) company that worked with Kessler early this year. Dorfman denies Kessler has any special access.

But Morf and representatives of three other companies say Kessler makes no bones about what his fees are for--favorable coverage. "The money we gave Kessler was for one purpose only: to meet with Dorfman," says one CEO. "[Kessler] promised a positive story."

Both Kessler and Dorfman deny that Kessler ever assures companies he can promise positive coverage. "Don has brought me a lot of great stories," says the reporter. "He has set up meetings where I've done negative stories. There's no guarantee with me."

South Pointe Enterprises Inc., a Cranston (R.I.) chain of X-rated entertainment shops, apparently thought otherwise. Soon after it hired Kessler in the fall of 1994, Kessler arranged a meeting of Dorfman and South Pointe CEO Carl Bruno. Kessler collected between $10,000 and $15,000 for the introduction, according to two sources familiar with the deal. Kessler says he received only $5,000, mainly for introducing South Pointe to X-rated video photographers.

Not long after Dorfman met Bruno, he wrote a bullish USA Today column, on Oct. 17, 1994, quoting Bruno's optimistic growth plans. Within three days, South Pointe's stock rose 25%, to 81/2, on volume averaging five times the norm of the preceding six months. The stock has since fallen to 4. South Pointe declines comment. Dorfman says he considered South Pointe an "impressive idea."

Alter Sales was another Kessler-related company Dorfman got interested in. Alter was a public "shell"--a money-losing auto-parts retailer taken over by Kessler clients with an undeveloped cable-TV advertising idea. Despite the company's questionable prospects, Dorfman featured it in his program on Apr. 18, 1995--after Kessler arranged a dinner with a company executive. That day, the share price rose slightly, to close at 7 1/8, on a record volume of 334,000 shares--seven times the average daily volume. As payment for his role in the takeover, Kessler received 20,000 shares of the company's stock. Former Alter CEO Morf says Kessler told him he reaped $150,000 by selling his shares on Apr. 18 during the heavy trading spurred by Dorfman's report. Kessler declines comment on the figure but confirms selling. He adds: "Dan couldn't care less if I sell stock." Dorfman denies any knowledge of Kessler's sales.

Within four months of the CNBC plug, the company collapsed. Today, the shares trade for around 40 cents. Morf says he was forced out in late August. Kessler, now on Alter's board, alleges that Morf stole company funds, which Morf denies. Dorfman defends his mention of the company as an "idea stock," noting that he later "knocked it" when it stumbled.

Kessler and Dorfman first met in the late 1970s at New York's Tavern on the Green restaurant, and the two hit it off. They share a tough upbringing in Brooklyn. Kessler is a high school dropout, and the 63-year-old Dorfman, who spent a few years in an orphanage, never graduated from college. They often shoot pool together on Saturday nights at a billiard club on Manhattan's East 86th Street. Kessler, a 51-year-old freelance promoter who focuses on penny-stock companies, has set up numerous dinners with Dorfman for his corporate clients.

NOTHING UNTOWARD. Their relationship benefits both: Kessler collects a fat fee, and Dorfman frequently gets a story. Dorfman acknowledges that his meetings with Kessler's clients yield fees for his friend. This fact, at a minimum, raises questions about the objectivity of his reporting. "That isn't fair to investors who may buy stock based on the reports," says one federal official.

Both Dorfman and Kessler deny anything untoward in their relationship. Both characterize Kessler's fees as nothing more than standard public-relations fees. "PR people come to me all the time. I assume they get paid," says Dorfman. "If Don is to be criticized for that, every PR business should be criticized." Adds Kessler: The suggestion that "Dan takes payoffs is total bull. He's interested in one thing, and that's a good story."

Dorfman denies that Kessler can influence his stories. And although Kessler allegedly claims the contrary to his clients, there's no certainty Dorfman will mention all of Kessler's companies. Indeed, another promoter says he paid Kessler fees of up to $15,000 on behalf of his clients, who feel cheated because Dorfman never did stories on them.

Nor is there anything wrong with pitching Dorfman stories. Public-relations firms often try to place articles in specific publications. But PR experts say the idea of charging big fees for a meeting with a particular journalist is unknown. "I've never heard of a company paying for an interview with a journalist. It's highly unusual," says George Sard, head of Sard Verbinnen & Co., a New York financial-PR firm.

And several sources allege that on one occasion Kessler threatened to use his access to Dorfman to punish clients who don't pay up. They point to Organogenesis Inc., a biotech company developing a substitute skin graft that BUSINESS WEEK wrote favorably about in its Inside Wall Street column in January, 1995. On February 9, Organogenesis was the target of a blistering report by Sturza's Institutional Research, a newsletter read by short-sellers--and often cited by Dorfman in stories.

MONEY OWING. Within days of Sturza's report, Kessler was introduced to executives at the Canton (Mass.) company. Three sources familiar with the deal say Kessler warned the company that Dorfman would run a negative story based on the newsletter. Kessler denies making that warning. The sources allege that Kessler assured company officials that a meeting with Dorfman would produce a positive story. Kessler requested $100,000 in cash but agreed to take $40,000, the sources say. Kessler denies that he ever asked for $100,000 or that he promised any positive coverage. But he confirms that he is owed $40,000 by Organogenesis.

After Kessler arranged a Feb. 22 breakfast meeting with Dorfman and company officials in New York, the journalist had this to say in a 40-second CNBC spot: "Biotech stock barons just recently knocked Organogenesis, based on a report by analyst Evan Sturza. The company says Sturza is all wet. Who knows who's right?" Although it wasn't the knock-out punch the company had feared, Organogenesis officials were angry they didn't get a positive plug and refused to pay. So Kessler called the company several times through mid-March. Several sources allege that Kessler threatened that Dorfman would air critical reports. Kessler denies ever making this threat. And although company officials have no knowledge of discussions between Dorfman and Kessler, Dorfman's views did harden: He slammed Organogenesis three times during the next few months, often citing Sturza's reports.

After back-to-back daily negative reports by Dorfman, Organogenesis' stock hit a 52-week low of 8 1/2 on June 2, a 45% drop from early February. Dorfman says he wasn't influenced by Kessler in any way. He has since stopped skewering the company. Its share price has rebounded to more than 18. A source familiar with the deal says the Securities & Exchange Commission has looked into unusually heavy trading prior to the Dorfman and Sturza reports. The SEC declines to comment.

Sources at the U.S. Attorney's office say this is not the only investigation under way concerning unusual trading patterns in stocks to which Kessler and Dorfman have ties. The probe by Brooklyn prosecutors and U.S. postal inspectors--who are involved because criminal securities violations can often lead to charges of mail fraud--stems from numerous scoops Dorfman reported in covering the saga of Spectrum Information Technologies Inc. in 1993. In May of that year, Dorfman did a negative report in which he debunked the value of a contract Spectrum had announced to provide technology to AT&T. The story sent the stock tumbling by half, to 6, on NASDAQ record volume of 34 million shares.

Furious, Peter T. Caserta, then Spectrum's president, hired Kessler to introduce him to Dorfman. As part of what became a roughly eight-month PR consulting agreement, Kessler says he earned $5,000 a month and $25,000 from the sale of Spectrum stock he received.

DROPPING APPLE. Until Dorfman's original report in May, Spectrum had been an obscure, money-losing wireless-communications company. But over the following year, Dorfman helped make it one of NASDAQ's most active stocks, with more than a dozen reports about the company. Many detailed market-moving management changes and Spectrum's growing legal problems. On Oct. 18, 1993, Dorfman broke the story that former Apple Computer Chairman John Sculley was joining Spectrum--and the shares soared. When Dorfman broke the news three months later that Sculley was leaving, Spectrum shares plummeted. After both disclosures, NASDAQ saw two of its biggest-ever single-day volumes for a stock.

The tipster for Dorfman's Spectrum scoops was Kessler, according to prosecutors. But now, the link may come back to haunt Dorfman and his friend. It drew the attention of investigators, who noticed unusually heavy trading before company announcements and before several of Dorfman's stories broke. That led to a formal investigation into Spectrum trading by the SEC and the U.S. Attorney's office--and also caused prosecutors to begin looking at the relationship between Dorfman and Kessler. Among the questions: Was Dorfman aware of insider trading in advance of his reports? And did he receive anything beyond news tips from Kessler in exchange for doing Spectrum stories?

A BUSINESS WEEK investigation also shows that in at least one example there appears to have been unusually heavy trading ahead of a Dorfman report on a small-cap stock Kessler is linked to. The stock was RailAmerica, a short-line hauler based in Alexandria, Va. Its CEO, Gary O. Marino, says Kessler helped set up a phone interview with Dorfman, which resulted in a positive CNBC story on Aug. 31, 1994.

But RailAmerica's stock started moving the day before Dorfman plugged the company: On Aug. 30, RailAmerica's shares jumped about 20%, to 3 1/4, on volume of 156,000 shares--triple the daily high for the previous eight months. Market experts say that can mean that investors or NASDAQ broker-dealers were positioning themselves in the stock before an expected market move. And the day of Dorfman's report, volume soared to 1.6 million shares as the price jumped to about 4 1/2--a 60% gain over the two-day period. BUSINESS WEEK has no evidence that either Kessler or Dorfman was tied to a leak. Dorfman denies any leak took place. He says that as with many stories reported by the press, his reporting calls can cause sources to conclude he is doing a story.

"BRANCH OUT." These days, Dorfman may be having second thoughts about the appearances of his friendship with Kessler. Kessler says Dorfman recently urged him to "branch out." Kessler has interpreted his friend's advice as a request not to rely so much on Dorfman for his stock-promotion business.

And Kessler seems to be having second thoughts of his own. Throughout the BUSINESS WEEK investigation--which included four dinners and more than a dozen interviews with Kessler--the stock promoter openly discussed his ability to get Dorfman to write about his clients. But facing questions about the impending investigation, Kessler backed off many of his previous assertions. He now says that many of the companies he had discussed earlier were really clients of Joseph Stevens & Co., a brokerage firm with which he became affiliated in 1994. Kessler also now claims he was paid for setting up a dinner for one client with this reporter.

Kessler has recently gotten involved in managing a client company, Comprehensive Environmental Systems Inc., a West Babylon (N.Y.) reclamation outfit. Kessler was named CEO of the penny-stock company in March. One of his first orders of business? Getting a plug on Dorfman's show. A few weeks ago, he arranged dinner together for Dorfman and Michael O'Reilly, Comprehensive's top environmental executive, at Pietro's in Manhattan. But so far, Dorfman hasn't mentioned it.


Have Dorfman's links to a stock promoter influenced his reports?


FALL, 1994 -- South Pointe hires promoter Don Kessler. He is allegedly paid $10,000 to $15,000 to arrange a meeting between South Pointe's CEO and Dorfman. Kessler says he received only $5,000 and provided other services.

OCT. 17, 1994 -- A bullish Dorfman report sends stock up 25%, to 8 1/2. Dorfman says he wrote it because it was an "interesting idea." Two months later, the stock begins to collapse. It currently trades below 4.


FEBRUARY, 1995 -- Kessler helps clients buy Alter Sales, using the company as a shell to develop an untested cable-TV advertising device. Kessler receives 20,000 shares. Soon after, Kessler arranges dinner with Dorfman for Alter executives and an investor.

APR. 18, 1995 -- Dorfman features Alter on CNBC. As stock rises slightly, to 7 1/8, Kessler sells stake for a $150,000 gain, says former Alter CEO. Four months later, Alter collapses. The stock now trades at 40 cents.


    Before it's here, it's on the Bloomberg Terminal.