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THE CUTTING EDGE | HEARD ON THE BEAT

Rival Accuses Motley Fool of Conflicts

May 19, 1997|LESLIE HELM

As competition intensifies among investment sites on the World Wide Web, a newcomer to the business has published a report that alleges conflict-of-interest problems at industry pioneer Motley Fool, and highlights the broader challenges online sites face in building credibility.

The Street (http://www.thestreet.com), co-founded six months ago by New York money manager James Cramer, ran an exclusive report Wednesday claiming a volunteer on one of Motley Fool's many discussion groups had been touting Medaphis, a medical-information company, as a prime acquisition candidate earlier this year while working with a broker to profit from the stocks' rising price.

Volunteers typically act as discussion "facilitators," answering questions and helping out newcomers in investment forums--the key attraction that brings approximately 500,000 visitors each month to the Motley Fool site to discuss stocks.

The Street took Motley Fool (http://www.fool.com) to task for launching an internal investigation into the activities of the volunteer in question and firing all 150 of its volunteers, but then failing to release the results of its investigation either to the public or to the Securities and Exchange Commission.

Motley Fool founders David and Tom Gardner published an open letter on their site Friday denying that any wrongdoing occurred on the site.

And in an interview, David Gardner dismissed The Street's report as "yellow journalism by the Celtics about the Bulls." Gardner said that while the volunteer in question may have engaged in questionable activities in direct e-mail with readers, he did not engage in any illegal activity on the Motley Fool discussion group.

Although Motley Fool suspended the volunteer when readers complained about his activities, "we didn't suspend him because he did something bad," said Gardner. He added that results of the internal investigation were not released because they "weren't conclusive" and because Motley Fool wanted to protect the privacy of the individuals involved.

"There isn't a reader in there who believes they should believe everything," Gardner said.

He added that Motley Fool's decision to hire 35 employees to replace its 150 volunteers was made before the problem cropped up, although the investigation did accelerate the change.

While The Street appears to have landed a punch with its scoop on Motley Fool's problem, Cramer faces some credibility issues of his own. Two years ago he faced an informal investigation by the Securities and Exchange Commission when his holdings in three stocks jumped in value by more than $2 million after they received favorable mentions in his column for Smart Money, a monthly investment magazine.

Cramer says he doesn't get involved in editorial matters on The Street and no longer mentions specific stocks in his columns.

Cramer did gain some new respect Thursday when he announced that The Street had beaten Dow Jones to win a deal to supply financial news to ABC's newly launched news site on the Web. Cramer says the deal with Walt Disney Co.'s ABC--under which The Street will get access to talent from Starwave, also partly owned by Disney--will help beef up the site's technology.

"Our site is now first-generation Pac-Man," says Cramer. "Soon it will be Nintendo."

But Cramer will need more than Mario to face up to the competition. The site has only 4,200 paid subscribers; Dow Jones' Wall Street Journal Interactive Edition (http://www.wsj.com), the electronic counterpart of the popular newspaper, boasts 100,000 subscribers paying $29 to $49 for one-year subscriptions.

And it has deep pockets. Tom Baker, business director, says the Interactive Edition is adding a couple of thousand subscribers a week and will soon come out with a remake that will add more technology news and an increased focus on personal investing.

Any credibility problems that do emerge among the new investment sites like Motley Fool could play to the strengths of such established institutions as the Wall Street Journal.

Another growing site battling to establish its credibility is Microsoft Investor (http://investor.msn.com). The site is part of the software company's online service--rather than a part of the MSNBC news joint venture--and it sees its strength not in editorial content but rather in powerful software tools that allow investors to use research and select stocks.

The site is already getting 125,000 visitors a day, although it may lose some readers later this month when it begins charging $9.95 a month for the service.

Cramer doesn't seem worried. "This business is about editorial, not software," he says. "We tell you how to make money."

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