By KATE BERRY

Published: March 19, 2000

Correction Appended

COULD this be the face of 21st century shareholder activism?

A new small-cap mutual fund, Allied Owners Action Fund, introduced on March 10, together with a companion Web site, will soon be making their pitch to rally shareholders and other investors against what they believe to be corporate greed and ineptitude.

Allied Owners is your standard small-cap fund with a major twist — it will invest in companies that it asserts will benefit from activist input. The Web site, eRaider.com, will solicit discussion from investors, and perhaps drum up a target company or two. Though distinct entities, both are run by Privateer Asset Management, a New York money management firm.

Privateer’s plan works like this: the fund will seek out and invest in target companies, and the Web site will alert independent investors and shareholders, so that they can invest in the same companies independently. If all goes well, these allies will pressure corporate boards to improve their performance.

Privateer plans to post its first list of target companies on eRaider in the next eight weeks.

If the whole project seems rather swashbuckling, consider the co-founder: Martin Stoller, 44, a professor at Northwestern University’s Kellogg School of Management, who is credited by activists with igniting the first Web-based shareholder revolt last year.

His target then was United Companies Financial, a subprime lender based in Baton Rouge, La. Professor Stoller posted messages on a Yahoo bulletin board — demanding that stockholders interests be better represented in impending bankruptcy proceedings — and forged an Internet shareholder alliance against United Companies’ management.

The alliance he formed won unheard of clout in United Companies’ bankruptcy proceedings, and Professor Stoller has led the shareholder’s equity committee, which is now formulating a reorganization plan for the company.

He said the experience gave him the idea of organizing small shareholders on a grander scale to target badly-run companies — and doing so early enough to avoid what happened at United Companies.

»What I was trying to do was figure out how to harness the special qualities of the Internet to address the very special problems of shareholders,» Professor Stoller said.

The fund and eRaider.com will be run as separate companies. Allied Owners has just $1.1 million in seed money — most of it from Professor Stoller himself. It plans to focus on companies with lax management and underperforming assets. In particular, the fund will search out companies that tend to escape Wall Street attention — those with no analyst coverage, little institutional ownership and market capitalizations under $500 million. At least for now, the fund will take less than a 5 percent stake in target companies.

For investors who want to participate in this kind of risky activism, the minimum investment is $2,500. The fund expects an expense ratio of about 1 percent. Privateer will absorb any legal expenses from lawsuits filed by target companies.

»We’re looking for companies that could use a little extra push, a little outside help,» said Aaron Brown, 43, a finance professor at Yeshiva University in Manhattan, the other co-founder of Allied Owners and president of Privateer. He is upfront in describing an investment in Allied Owners as a gamble, and said people who were not ready to risk their money should hold off several years before buying into the fund.

Despite the flamboyant rhetoric about pirates and raids, both professors said the fund was not targeting companies for takeover.

RATHER, their aim will be to organize a large block of a company’s shareholders — 25 to 40 percent — and to fill Internet message boards with criticisms that supporters hope will eventually nudge management to do whatever is needed to increase shareholder value. A proxy fight is always an option.

»We will have a shadow board of directors on the Internet,» said Professor Brown, who manages $24 million in assets for private individuals, including Professor Stoller. Professor Brown said he would be responsible for picking the companies the fund invests in. His wife, Deborah Pastor, 42, is the fund’s trader.

The eRaider Web site, emblazoned with cannon and sabres, is something else. There’s none of the legal-speak of the securities industry. And 36 paid bulletin-board moderators will soon be encouraging input from the public about the companies the fund is invested in.

At least initially Privateer will count on word of mouth and the array of stock chatrooms on the Web to recruit shareholders.

Professor Stoller made his fortune in a software and dating service business, Plextel Telecommunications, which was later sold to the Cendant Corporation for $60 million. He says the fund and Web site will both strive for transparency in their dealings with corporations, allowing individuals to directly monitor developments. Still, he revels in eRaider’s buccaneering, revolutionary image. »We are as close to the Weathermen as you’re going to get in the financial world,» he said, referring to the radical underground organization.

Other activists are starting to use the Internet. Nell Minow, a veteran shareholder activist with Lens Asset Management of Washington, has moved her campaign online at TheCorporateLibrary.com.

She called the start of the eRaider venture a »seismic development.»

Others are a bit more cautious. »There’s no way to tell right now how many shareholder eyeballs they’re going to get,» said Stephen Davis, president of Davis Global Advisors, a money management firm. »But the more shareholders they get, the more influence they’ll be able to wield at companies.»

Photo: Martin Stoller, a professor at Northwestern University’s business school, has co-founded a swashbuckling shareholder activist fund. (Steve Kagan for The New York Times)

Correction: March 26, 2000, Sunday An article last Sunday about the Allied Owners Action fund, a mutual fund devoted to shareholder activism, misstated the age of its trader, Deborah Pastor. She is 43, not 42.