At any given moment, Joe Donahue, a cornerstone and an investor in the popular StockTwits investing community and a veteran of a quarter century of trading, may be making another intraday call on a stock for his community of subscribers who pay him nearly $800 a year for his trading system.
Financial social media, for which a few minutes to sign up for an account is the only investment needed, allows participation in a community as active and diverse as the markets themselves. But it begs a question: Who, exactly, is giving all this opinion and the analysis?
Far off, unpleasant things
Joseph William Donahue is a 25-year veteran of trading. He has done a little bit of everything including founding a pair of hedge funds: one fund that he said reached $500 million in assets and a second fund with former Major League Baseball pitcher Todd Stottlemyre. (The partnership soon split, however, with little capital apparently being raised and Stottlemyre joining multilevel marketing company ACN in 2010.)
For a trader looking for new perspective or some additional training, paying for Donahue’s service may be money well spent. (Donahue’s recent trading performance records are private and the Southern Investigative Reporting Foundation couldn’t obtain the track record for his two hedge funds.) But for people with an understanding of Wall Street history, his resume alone might prompt serious second thoughts before they reach for their wallet.
According to FINRA’s Brokercheck, Donahue’s career began promisingly enough in 1982 at Kidder Peabody’s retail brokerage unit and included stops at Smith, Barney, Shearson Lehman, Prudential-Bache and Oppenheimer. Apart from the fact that all of these firms are now Wall Street memories — save for Oppenheimer, which has become a troubled penny stock brokerage — they were members of Wall Street’s firmament. (The Financial Industry Regulatory Authority, or FINRA, is the self-regulatory arm of the brokerage industry that examines member firm’s and their employees to ensure compliance with regulations.)
Starting in 1991, for reasons that remain unclear, Donahue took the elevator down to Wall Street’s boiler room sublevels and stayed there for 10 years.
Regardless of Wall Street’s epic failures over the past decade, they remain a distant second to the laundry list of boiler room sins. All of the shops Donahue worked at are now gone, with most banished from FINRA. A.S. Goldmen and D.H. Blair, both former employers (he was only at D.H. Blair for three months), were indicted by former New York County District Attorney Robert Morgenthau for being “criminal enterprises,” and both firms would ultimately have their chief executives, as well as numerous brokers and administrators, sentenced to prison terms.
After A.S. Goldmen, Donahue joined The Boston Group (which was headquartered in Los Angeles) and headed up one of its New York offices for two years. In 1997, under heavy regulatory scrutiny for its dubious practices — including the boiler room standard, cancelling client “Sell” orders so that its inventory of “house” stocks didn’t decline in price — the firm ceased operations. In 2003 FINRA permanently banned its chief executive Robert DiMinico from the securities industry.
After one of Donahue’s A.S. Goldmen clients filed for arbitration in October 1994 for allegedly mismanaging an account, FINRA assessed both Donahue and A.S. Goldmen a penalty of just over $65,000 in August 1996.
In 2001, Donahue left the brokerage industry and founded Cornell Capital Partners with two other colleagues from the May, Davis Group (which, true to form, was expelled from FINRA in 2006.) A hedge fund that specialized in private investments in public equities, or PIPEs, the fund was profitable but had a high-profile relative to its size because its practice of structuring heavily dilutive stock transactions for its small- and micro-capitalization clients often angered investors, who saw the share price decline when the market was swamped with additional shares. Alternately, short sellers would focus on Cornell Capital-financed deals given the inevitable decline in share price from dilution. In 2004, Donahue, along with another founder, had his partnership interest bought out for $2.625 million (the filing does not break out what percentage was paid to Donahue.)
In 2012, five years after Cornell Capital changed its name to Yorkville Advisors, the SEC sued the fund for allegedly inflating the value of its portfolio.
The Southern Investigative Reporting Foundation sought to understand why a fellow who started off with name-brand employers, a love of markets and the prospects for making real money would, after almost a decade in that world, make a beeline for firms that wound up in prosecutorial crosshairs for everything from sales fraud to organized crime links.
In an exchange of emails with the foundation, Donahue did not address his boiler room background, other than to note he has disclosed everything and that “Anyone can google me and my history.” A search of his Twitter feed and his many blog posts, some going back to 2009, show that while he readily waxed nostalgic about his time at Bear Stearns and Shearson Lehman, not much was readily discoverable about his service in boiler rooms.
Describing the 1994 FINRA arbitration claim as the seemingly inevitable result of being a broker for a long period of time, Donahue said, “There will be a percentage of people that lose money and a percentage of them might make a claim. It happens.”
Howard Linzon, the venture capitalist and hedge fund manager who founded StockTwits, remained in Donahue’s corner, telling the foundation that he felt, “Joe is a fairly straight shooter” and that he didn’t care about something that happened in the 1990s.
“Is Joe still doing that boiler room stuff now? No, he’s not” he said.