By Peter Petre RESEARCH ASSOCIATE Margaret A. Elliott

(FORTUNE Magazine) – BATTLE ROYAL OVER A MYSTERY STOCK Professional investors at war over a company called CopyTele have sent the share price from $10 to $40, down to $16, back to $40, back to $16, up -- after a 3-for-1 split -- to $20, and down to $6. The company they are fighting over has no products, no revenues. ADOLPH HUBER, an unemployed former policeman in Lodi, California, lost his life savings in April on a stock called CopyTele. Huber, who spends his days nursing his mother, a stroke victim, started buying the stock two years ago on the advice of a relative. When his initial investment did well, Huber bought more. He believed a New York investment letter's prediction that CopyTele, a secretive technology company, would be the next Xerox. He listened to tips % from his broker that a major company was about to step in and buy CopyTele for a large premium over the market price. By January of this year Huber had put up $200,000 to buy $400,000 of CopyTele stock on margin at an average price of around $9 a share. His dreams of riches were coming true: with the market price at nearly $20 a share, his stock was worth almost $900,000. Then events seemed to conspire against him. The stock barely budged when CopyTele announced a breakthrough that it equated with the invention of the transistor. Then word got around that the Securities and Exchange Commission was looking into trading in the stock, and CopyTele co-founders Denis Krusos and Frank DiSanto disclosed to the SEC that they planned to sell some of their holdings. The price of CopyTele shares began to plunge. As it fell, first to $12 a share and then lower, Huber got hit with margin calls. He sold all his other stocks to raise cash, but his equity was soon wiped out. His broker sold Huber's stock on April 3 when CopyTele reached $6 a share, and Huber ended up with nothing but a $12,000 bank debt.

The wild price swing to which Huber fell victim is nothing new for CopyTele, whose stock chart looks like a profile of the Pyrenees. CopyTele is a vivid example of what can happen when professional Wall Street bulls and bears go to war with each other over a thinly traded stock. Such fights are commonplace on Wall Street; fur is also flying now, for instance, over the stock of Cannon Group, a film producer. But the CopyTele battle has been noisier and longer fought than most.

Both bulls and bears have accused each other of rigging the market for the stock. Says newsletter publisher Donald McShane, the biggest CopyTele bull: ''In my 25 years in the securities business, I have never seen such blatant manipulation of a stock by unknown parties.'' A New York money manager who at one point was out $1 million on a short position in the stock ruefully called CopyTele trading ''one of the strongest rigs I've ever seen.'' He is still short, and well ahead now. CopyTele (pronounced copy tell) has neither products nor revenues. Yet its shares have intermittently commanded a total market value of more than $100 million, greater than the market values of 250 New York Stock Exchange companies. CopyTele, traded over the counter, started out as one of the hottest new stocks of 1983, zooming from $10 a share at its initial public offering in October to $31 by year-end. Even though its magic seemed to derive as much from hype as from credible promise (FORTUNE, June 11, 1984), CopyTele built an ardent following. The stock split 3-for-1 last November; adjusting for that, even the sickening plunge to $6 that wiped out Huber left CopyTele shares trading 80% above their initial price. Insiders hold more than half of CopyTele's 8.6 million shares. The publicly traded shares are concentrated in relatively few hands, and only five broker- dealers make a market in it. A veteran dealer who dropped the stock after trading it briefly told FORTUNE, ''I didn't want to get involved. It was rigged up and down. Who needs CopyTele? I trade enough real stocks, like Apple and MCI.'' CopyTele rents offices at the edge of a suburban shopping mall in Huntington Station on New York's Long Island and lives off the proceeds of its public offering, now about two-thirds spent. It has yet to deliver a product it originally promised to bring to market in early 1984. The company is trying to develop a low-cost, high-resolution flat computer screen that could replace bulky cathode-ray tubes in a variety of applications. The first of these is a product CopyTele claims will revolutionize the copier business. Called the CT- 100, it would snap on in place of a copier's ordinary lid, making it possible for the copier to print out charts and data from a computer. SNAGS IN DEVELOPING the flat screen made the CT-100 a no-show. To produce an image sharp enough for copying, the screen must have much higher resolution than inexpensive flat screens developed so far, such as the liquid-crystal displays used in laptop computers. CopyTele plans to use electrically arranged dye particles instead of liquid crystals. That technology has never been made to work in a commercial product. Xerox and Matsushita Electric tried and gave up. A unit of Exxon Enterprises labored for seven years, won 27 patents, and finally succeeded in creating a display with a resolution about equal to liquid-crystal panels. When Exxon could not persuade computer makers to use its invention, it closed the division and put the flat screen on the shelf. One reason CopyTele shares have commanded such high prices may be the company's adroitness at forming, and flaunting, ties with prestigious companies. It got Xerox to agree, in a nonbinding letter of intent, to market the CT-100 if it ever materializes. Then, invoking the copier giant's interest, the company persuaded Mitsubishi Electric to design a key component and prepare to manufacture parts for the product. Xerox and Mitsubishi were featured prominently in CopyTele's 1983 prospectus. They continue to show up in its financial reports, even though Xerox says it has not heard from CopyTele for almost two years. Mitsubishi at first said it was satisfied with CopyTele's progress but now refuses to discuss the relationship. Denis Krusos, the mastermind of CopyTele, is a 58-year-old lawyer and engineer who makes a great ceremony of secrecy and refused FORTUNE's requests to be interviewed. The CopyTele chairman emerges in conversations with former associates as a charismatic, self-absorbed promoter with an evasive manner and a mystical turn of mind. Acquaintances say he is intrigued by his Greek heritage and by stories of the Olympian gods. According to former associates, he gets business ideas, which he sometimes calls visions, during periodic sojourns in the Greek mountains. One vision, as related by a stock trader, is that Krusos and DiSanto will be remembered as the next Hewlett and Packard. Krusos has owned a succession of businesses, including a factory that made cheap handguns. His biggest coup came not in the marketplace but in a nasty lawsuit involving Visual Sciences, a public company he and DiSanto, 61, ran before they started CopyTele. In the 1970s Visual Sciences teamed up in a joint venture with Matsushita to sell Matsushita facsimile machines outside the Far East. The joint venture was a money loser, and the companies split when Matsushita clumsily tried to circumvent Krusos, to whom it had granted exclusive marketing rights, by dealing directly with important customers. Visual Sciences sued, winning an injunction from a suburban New York judge that blocked Matsushita from marketing its facsimile machines on its own. Krusos engaged the help of flamboyant litigator Roy Cohn and hired a private investigator who one source says turned up evidence that Matsushita had been bribing U.S. union officials. Matsushita says the bribery allegations were groundless but otherwise refuses to comment on its relations with Visual Sciences. It paid Visual Sciences $31 million to settle the suit. Krusos then liquidated the company. As shareholders, he and DiSanto each got more than $1 million. Next came CopyTele. The company found its most enthusiastic investor while its public offering was still in the works in 1983. Donald McShane is a soft- spoken investment adviser who publishes a newsletter from his apartment on / Manhattan's fashionable East Side. A gold bug during the 1970s, McShane shifted to speculative new stock issues when precious metals cooled. Buying for himself and clients whose accounts he manages, McShane has amassed a huge hoard of CopyTele stock: over one million shares, some 40% of the shares in public hands. CopyTele's apparent defiance of investing gravity quickly attracted the attention of another Wall Street cadre: professional short sellers. The shorts, as they are known, borrow shares of a stock whose price they think is going to fall and sell them. If the price does drop, they buy the stock at the lower price, replace the shares they borrowed, and keep the change. A great many shorts got interested in CopyTele late in 1984 when the stock reached $40 a share amid rumors of an impending merger with Xerox. One of the first to question CopyTele's lofty price was Michael Murphy, 44, publisher of a little-known newsletter called the Overpriced Stock Service. Murphy did more than identify CopyTele as a Wall Street dog. Once he panned the stock, he allowed subscribers two weeks to react. Then a publicist in his employ spread the negative analysis to newspaper reporters in hopes of triggering a drop in the stock. The price sank, but not nearly as far as Murphy thought it should. He figured CopyTele was worth about $2.50 a share (before the 1985 split). Investors on both sides agree that short positions in CopyTele were huge by the end of 1984, though no one knows exactly how big. McShane blames manipulation by short sellers for a sharp decline in CopyTele's stock price after the merger rumor died out. He retaliated by attempting to trigger a short squeeze. Short sellers depend on the willingness of shareholders to lend their stock. Under normal circumstances, plenty of stock is available for borrowing because the fine print on margin account contracts allows stockbrokers to lend those shares. McShane urged investors to remove their CopyTele shares from the lendable pool by shifting them from margin accounts into fully paid accounts and asking for delivery of the stock certificates. If enough investors were to do so, brokers would force shorts to buy stock to replace what they had borrowed, and the buying pressure would drive the price up. McShane's campaign failed to reverse the stock's decline, which continued for the first eight months of 1985. But as the stock hit $16 a share last August, CopyTele found another booster. William Dillon, 29, worked as a stockbroker while he was a student at Harvard, but his brokerage career was cut short when the National Association of Securities Dealers permanently barred him from the business for allegedly embezzling client funds. Dillon says he was innocent but ''didn't have the money or the time to fight city hall.'' Dillon first latched on to CopyTele not as a bull but by successfully going short 2,000 shares. Then he grasped the potential of a CopyTele short squeeze. The effect was the investing equivalent of the conversion of Saint Paul. If McShane had been CopyTele's Boswell, Dillon became its Elmer Gantry. He took out full-page ads in the New York Times and Investors' Daily promoting CopyTele with the headline HERE'S A STOCK THOMAS EDISON WOULD BUY and urging investors to get in on squeezing the shorts. The ads apparently worked. A short squeeze developed last September, and the stock zoomed 80% in three weeks. Some shorts rushed to buy stock to cover their positions, helping to drive the price up. As the price rose, margin calls went out that wiped out other shorts. By Christmas the stock had split 3-for-1 and was selling at $20 a share, equivalent to a presplit price of $60 a share, nearly four times its August price. As short squeezes go, however, CopyTele's was anemic. In 1978 panic buying by shorts covering their positions drove the price of Resorts International, the casino operator, from $19 a share to $190 in six months. CopyTele's squeeze may have been sapped by the decisions of some original investors to reap profits. ''When it split and went to $20, I couldn't stand it,'' says Alfred ''Moose'' Copeland, a principal in the New York securities firm of Baird Patrick. Copeland had paid $2 each for his 25,000 shares, and unloaded more than half his position at $19. Total profit: over $750,000. The stock started back down last February after the New York Times reported that the SEC was investigating the autumn run-up. Several securities houses, including Bear Stearns and Pershing Inc., a division of Donald son Lufkin Jenrette, raised margin requirements on the stock. Then, in March, Krusos and DiSanto, who each owned 19% of CopyTele's stock and had vowed not to sell until the CT-100 was a reality, registered to sell 400,000 shares, or 12% of their holdings. In 12 weeks the stock lost 70% of its value. SEC disclosure documents show that Krusos and DiSanto had each sold 20,000 shares at an average price of $15.70 by the end of March. McShane, still a bull, held on to the stock. By April he and his clients were out $16 million on paper. McShane and Dillon again blame manipulation by short sellers for the drop. CopyTele's gut-wrenching moves have spurred investors to desperate efforts to get information. While the stock was spiraling upward, a young security analyst who had sold it short drove to CopyTele's office and rooted through a dumpster out back, hoping to find damaging information. His sojourn among the coffee grinds did him no good. The stock kept rising until he could no longer meet margin calls and he lost $90,000. More recently, with the stock on the way down, bulls became inquisitive. William Dillon flew to New York from Boston in hope of catching Krusos, whom he had never met, at his office. With him was Christopher Reynolds, a technology consultant and owner of 2,000 CopyTele shares. A secretary told the pair that Krusos was too busy to meet them. Dillon and Reynolds waited in the corridor and buttonholed Krusos 90 minutes later when he stepped out of his office. Reynolds recalls the encounter as though he had met Socrates. Krusos would not answer questions but let Reynolds describe how he thought the flat panel might work. Reynolds began ticking off possibilities, each more technically involved than the last. Krusos merely smiled. Finally Reynolds named the most exotic technology he could think of. Bingo. Krusos responded with what Reynolds remembers as ''a poignant pause and look of gleeful disdain.'' Reynolds came away convinced he had guessed right. CopyTele may be gathering for another big burst of promotion. It paved the way in January by announcing it had finally achieved its first laboratory prototype of the display. According to the company, its 2-inch-by-2-inch test screen can faithfully reproduce characters as tiny as the numbers in a newspaper stock table. The announcement has CopyTele watchers guessing again, largely because Krusos has not shown the device to anyone. The claims made in CopyTele's annual report to the SEC are grandiose: ''The company believes that, with this microimage achievement, an era of new applications and products are possible in the same manner that the transistor and microchip revolutionized the electronics industry.'' But four pages later the reader comes to warnings that it may not be possible to mass-produce the flat screen and that no one may want it. Even CopyTele's harshest critics concede that a working prototype of the flat screen could help attract an acquirer. But they still do not believe that the screen will make shareholders rich. If it does work, newsletter publisher Murphy says, CopyTele stock could be worth as much as $2.50 a share, three times what he maintains it is worth now but only one-third of its recent market price. CopyTele's boosters and detractors both have great expectations for the company's annual meeting, scheduled for May 29. Bulls are hoping to see the new prototype and to hear a reasonable explanation of why Krusos and DiSanto are selling stock. Bears are hoping for something along the lines of last year's annual meeting, surely one of the more unusual events in corporate annals. At the front of the meeting room in a Long Island hotel were a dais, a copying machine, and a mysterious boxy shape covered with a black cloth. Krusos delivered glowing remarks about the company's progress and seemed ready to permanently silence skeptics. But when he whisked away the black cloth, he revealed not the flat screen itself, but a nonfunctioning mock-up of a prototype. Brokers are now taking bets about what will be under the black cloth this year.