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FEATURE
OptionsXpress: Out of the Money?
By BILL ALPERT
There is reason to be skeptical about claims made by Optionetics, a
trading-seminar outfit that optionsXpress hopes will lure customers.
WHEN GEORGE FONTANILLS E-MAILED ME ABOUT his high-profit, low-risk
strategies to make money regardless of market direction, I resolved to
take in a free workshop from Optionetics, the outfit that's shared
Fontanills' trading secrets with 336,000 people since 1993.
Optionetics had been acquired in May by online broker optionsXpress
Holdings as a way to revive the broker's account growth and its share
price (ticker: OXPS). OptionsXpress shares lost two-thirds of their
value after a 10-year boom in options trading subsided last year. This
year the stock has sprung back twice as much as the market -- to a
recent $17.52 and a market capitalization of $1 billion -- as
investors flock to brokerage shares and the online broker tells
investors that Optionetics trading seminars will help it open 10,000
new accounts annually.
But the Optionetics workshop turned out to be like many "wealth
without worry" spiels. Thirty of us who gathered at a Brooklyn
Marriott hotel heard a "copyrighted" presentation by an Optionetics
representative. Fontanills was "the most respected hedge fund manager
on Wall Street today." He'd appeared in The Wall Street Journal and
Barron's. We could all make a handsome living in the options markets
on just a few trades per month. Whether the market went up, down or
sideways, we could reap gains of as much as 24,000%. Fontanills'
strategies gave us a 3-out-of-3 chance of making money. Despite such
odds, few signed up for the $3,000 class that Optionetics was offering
two weeks later.
Table: Losing Its Special Status
Even if Optionetics delivers 10,000 new accounts per year to
optionsXpress, there is reason to question whether those accounts will
prove of more than limited value. Only two of the folks in my workshop
had ever traded anything, even stocks. And when I followed up with a
woman who offered a glowing testimonial in Optionetics' presentation
materials, she said she was back at her day job and no longer a
trader. The wave of retail options trading may have crested for
Chicago-based optionsXpress. Its rival thinkorswim was acquired in
June by TD Ameritrade for $600 million, which was a multiple of
1.6-times trailing revenue and seven-times pretax earnings. At those
multiples, optionsXpress would at best trade for 80% of its current
share value.
As for Fontanills, our investigation suggests that he may have been
more successful selling seminars than trading options. A leading
options broker closed Fontanills' account after just five months and
sued him in 2003 when he failed to honor margin calls on his trading
losses. In a sworn court filing that year, Fontanills said his annual
income was less than $15,000 and his net worth was $7,150. Fontanills
says his trading losses resulted from margin calls by brokers who
didn't understand his strategies. "How many very sophisticated
investors and traders got themselves in trouble and eventually, for
whatever reason, lost the money?" he asks. "It happens all the time."
OptionsXpress Chief Executive David Fisher insists that the trading
strategies taught by Optionetics work. "Their educational content is
tremendously good," he said. "That's why we bought the company."
"George [Fontanills] is very well respected in the options industry,"
said Fisher.
According to a company bio, Fontanills created the science of
Optionetics in the early 1990s after surviving cancer, attending
Harvard Business School and losing money in real estate. Fontanills
hawked his Optionetics techniques, with a rags-to-riches appeal.
"A few years ago, I was driving a beat up clunker of a car and had
just quit the corporate rat race," said Fontanills in a 1998 Internet
sales pitch. "Today, I own a BMW, a Porsche and a Viper . . . all
bought with the profits from trading. I maintain three houses and own
numerous properties in Florida and overseas."
"By slashing your risk to near zero," he promised. "Your trading will
be monstrously profitable."
"PROVEN IN THE REAL MARKETS"
"GUARANTEED!
OPTIONS VOLUMES WERE STARTING a decade of 22% annual growth, from 400
million contracts a year in 1999 to 3.3 billion in 2008. Retail
investors wanted in, and thousands came to Optionetics workshops like
the one I attended. In 2008, about 32,000 folks came to the free
workshops and about 10,000 paid for follow-up seminars.
The online broker optionsXpress also benefited from the surge in
options volume. For four years running, a Barron's reviewer gave its
online trading tools the top rating. But after enjoying 30% growth in
2007, the broker's revenue flattened in 2008 to $247 million, while
earnings slipped 8% to $90 million. Per-share earnings fell only 4%,
to $1.49, due to share buybacks.
By July 2009, one of the broker's key performance measures was
faltering: Net new accounts for the month were just 1,400, after
averaging 3,400 in the prior 12 months. To boost those numbers,
optionsXpress had spent $20 million in cash to acquire Optionetics.
Fisher figured that within two years his firm could be opening
accounts for almost 25% of those who walk into an Optionetics class.
That would mean 800 new customers a month. Fisher says the plan is
working. In August the broker added 2,500 new accounts.
When I told Fisher of the promises I heard in the July 29 Optionetics
workshop, he seemed unperturbed. "What you went to is a sales seminar,
an extended infomercial,
Was Fontanills really Wall Street's most respected hedge-fund manager?
I asked the optionsXpress chief. "He ran a hedge fund that generated
very nice returns for the years it was open," Fisher said. After
saying Fontanills -- who still runs seminars under contract -- isn't
an optionsXpress employee, Fisher's firm sent me 17 books by
Fontanills and put me in touch with Chicago Board Options Exchange
educator Jim Bittman, who said he taught similar techniques.
OptionsXpress gave me excerpts from a 2001 letter that Fontanills sent
to investors in his Pinnacle Investments of America fund. These showed
gains of 48% for 1998 and 83% for 1999, and a 24% loss for 2000. There
was no mention of how much money was involved.
The fund's account custodian was a Salomon Smith Barney broker in
Hallandale, Fla., named Jose A. Gomez -- Fontanills' friend and
cousin. But e-mails from Fontanills to Gomez's boss on Sept. 10, 2001,
show that Fontanills was trying to stop Smith Barney from liquidating
his fund's account. "This will cause serious losses," wrote
Fontanills, "and will essentially put us out of business." Neither
Smith Barney nor the Options Clearing Corporation knew how to price
his positions, Fontanills argued. Fontanills says he prevented big
losses by moving the account.
In 2002, Smith Barney fired Gomez and the NASD then barred him for
failing to provide information to investigators. (Barron's couldn't
determine the nature of the inquiry.)
Fontanills ultimately closed the hedge fund, he says. "Managing money
for other people is different from managing your own money," he told
me in an interview.
OptionsXpress shares look overvalued after a strong run. The firm's
bid to boost growth by buying a seminar group seems ill-advised, based
on the record of the group's founder.
But Fontanills came to grief managing his own money, too. In June
2003, he opened a New York account with the French-owned broker Fimat.
By November, according to a complaint Fimat filed in Manhattan's
federal court, Fontanills had run up losses of more than $6 million.
When he refused to honor margin calls, Fimat liquidated his positions
and sued him for the $6 million. Fontanills again argued Fimat didn't
know how to price his sophisticated options strategy or calculate the
margin requirements. The dispute wound up before arbitrators, who
ordered Fontanills to pay Fimat $1.8 million with costs. He paid.
After 10 years of applying his Optionetics strategies, Fontanills'
wealth wasn't what you might expect. When opening his Fimat account in
2003, he listed his net worth as $4 million. Four months earlier, his
sworn financial statement in a Massachusetts divorce court represented
his personal net worth as $7,150, plus another $473,500 in a trading
business. His annual income, he told the court, was less than $15,000.
"Both financial statements were correct at the time they were made,"
Fontanills said in an e-mail last week. He has a new trading business,
incorporated in the name of his current wife, called the Robo Trader
Algorithmic Trading Fund.
The Bottom Line
OptionsXpress shares look overvalued after a strong run. The firm's
bid to boost growth by buying a seminar group seems ill-advised, based
on the record of the group's founder.
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