An Analysis of the Online Trading Report Released by the United States Securities and Exchange Commission on November 22, 1999 by Blake A. Bell (1)
III. Investor Chat Rooms and Bulletin Boards
A. Background
Investor chat rooms and electronic bulletin boards raise the spectre of "corporate cybersmears." A corporate cybersmear is a rumor about a company, its management or its stock that is posted anonymously on an Internet message board or in a live "chat room." Companies that believe such postings to be false and defamatory increasingly resort to lawsuits against unknown "John Doe" defendants responsible for the postings. Once such a suit has been filed, the corporate plaintiff typically uses the subpoena process to gain information from the message board or chat room host to permit identification of the anonymous or pseudonymous author(s) of the postings.(21)
In a recent speech, SEC Commissioner Laura S. Unger outlined the problem succinctly. She said:
Investors are also using Internet chat rooms and bulletin boards to comment on companies. Some of these postings have been enormously helpful to investors and companies. Some other postings have not ? reportedly leading to wild fluctuations in stock prices on days where there is no legitimate news about the companies. For example, PairGain Technology?s shares rose 30 percent based on a fake Internet posting announcing that the company had been purchased by a rival. What is interesting is that the stock price only dropped 20 percent after the fraud was discovered.
Some companies have started patrolling the Internet in search of these discussions, or hiring somebody else to do it for them. A quick check uncovered six firms that offer this service to companies. I know of one search service that already has nearly 300 issuers as clients.
Companies have to worry about chat rooms and bulletin boards because the Internet allows for rapid dissemination of information to a large audience. Disgruntled employees can easily post information anonymously which may move a company?s stock price. Some short sellers are getting into the act as well by posting "cybersmears" about a company. Conversely, corporate management anonymously hyping the stock is a problem with some small companies that have a more direct interest in seeing the company?s stock price rise.(22)
Few would deny that financial message boards and chat rooms have caused headaches for companies and regulators alike. Indeed, corporate cybersmear lawsuits are becoming almost commonplace. One recent news report states that Silicon Investor ? only one of the four principal financial message board sites ? "receives about one subpoena a day" seeking the identities of authors of message board postings.(23)
In the last few months, corporate cybersmear lawsuits reportedly have been filed against unknown "John Doe" defendants by such companies as Fonix Corp., Owens Corning, Bioshield Technologies, Inc., Total Renal Care Holdings Inc., ZiaSun Technologies, Inc., and Lily Industries Inc.(24) These suits join the nearly fifty such suits that already have come to light, with many more likely winding their way quietly through the nation?s judicial system.(25)
B. Conclusions of the Report as to Investor Chat Rooms and Bulletin Boards
The report urges the Commission to conduct a study, or to encourage researchers to conduct a study, to analyze the effect of bulletin board and chat room discussions on companies' stock prices. Additionally, the report urges broker-dealers operating on-line discussion forums to consider adopting certain best practices to prevent investor confusion.(26)
With regard to e-broker-sponsored message boards and chat rooms, the Report contains a statement that may bring shudders to executives at E*Trade, which sponsors on-site financial message boards. The Report states that "[a]n open question is whether broker-dealers provide some benefit to investors by sponsoring such forums or whether broker-dealers should not lend these forums the imprimatur of legitimacy." Report at 85.
As for issuers, the Report urges such companies to "look at the use of Internet discussion groups by their employees . . . [and] consider adopting and actively enforcing policies monitoring the use of electronic forms of communications by their employees." Id.
The Report expresses a concern that any evidence suggesting that on-line discussion forums actually affect stock prices is merely "anecdotal." Thus, "the Commission and other interested researchers are encouraged to study the effect of postings on on-line discussion forums on stock price volatility." Id. at 86. Additionally, the Report urges e-brokers that host such forums to develop best practices including: (i) requiring posters to register; (ii) encouraging posters to disclose their stock positions; (3) monitoring the on-line discussion forums; (4) using notices to advise investors not to rely on on-line discussion forums as a sole or primary source of investment information and (v) disclosing the identity and professional experience of the event leaders. Id.
The Report's request for a study of the impact of online postings on stock prices is admirable, but the "anecdotal" evidence seems so overwhelming that the results seem pre-ordained. Moreover, what the Report suggests as "best practices" for e-broker discussion forums is entirely inconsistent with the "wild west" spirit of many such communities (at least to date). It would seem that the implementation of such practices would likely impact the size of the online community and even cause the migration of participants to non-e-broker sites like Silicon Investor, Raging Bull and Yahoo! Finance -- which may be precisely the result the Commission may ultimately desire.
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(1) ¸ 1999 by Blake A. Bell. All rights reserved. Blake A. Bell is Senior Knowledge Management Counsel with Simpson Thacher & Bartlett, a 600-lawyer firm in New York City. He focuses on computer-related matters including securities regulation and the Internet. His biographical information is accessible at <http://www.simpsonthacher.com/bios/bio132.htm>. He may be reached at b_bell@stblaw.com. These materials reflect his views, not necessarily those of his Firm.
21) See, generally, Blake A. Bell, Dealing With False Internet Rumors: A Corporate Primer, 2(7) wallstreetlawyer.com 1 (Glasser LegalWorks Dec. 1, 1998) (updated version available at <http://www.simpsonthacher.com/memos/art006.htm>); Lyrissa Barnett Lidsky, Silencing John Doe: Defamation and Discourse in Cyberspace, forthcoming in Duke L.J. (advance copy in author?s files).
(22) Getting To Know You: Dealing With the Wired Investor - Remarks by Commissioner Laura S. Unger, U.S. Securities & Exchange Commission at the American Society of Corporate Secretaries, Greenbrier, West Virginia, June 25, 1999 <http://www.sec.gov/news/speeches/spch287.htm>.
(23) See Jason Anders, Sites Unmask Online Investors Before They Can Fight Back, Wall St. J. Interactive Ed., Oct. 1, 1999 <http://interactive.wsj.com/articles/SB938784918603530302.htm>.
(24) See Steven Oberbeck, Online Remarks Are Out of Line, Salt Lake Tribune, Oct. 27, 1999 <http://www.sltrib.com/10271999/business/41744.htm> (Fonix Corp. suit against ten "John Doe" defendants); Benjamin Weiser, Lawsuit Over Web Posting, N.Y. Times on the Web, Oct. 28, 1999 <http://www.nytimes.com/library/tech/99/10/biztech/articles/28net.html> (Owens Corning suit against "John Doe" defendant); Bioshield Institutes Legal Action To Stop Defamatory and Fraudulent Statements on Internet Message Board [Press Release], Bus. Wire, Sept. 2, 1999 <http://www.businesswire.com/cgi-bin/f_headline.cgi?day0/192451260&ticker=bsti>; Bioshield Sues Over ?Defamatory? Chat Room Talk, Excite News, Sept. 3, 1999 <http://news.excite.com/news/r/990903/02/net-health-bioshield?printstory=1>; Total Renal Sues Internet User, Alleges Misleading Postings, Bloomberg.com, Aug. 24, 1999; ZiaSun Files Second Defamation Lawsuit [Press Release], July 2, 1999 <http://www.ziasun.com/pr-02jul1999.html>; Aaron Elstein, Heard on the Net: ZiaSun Sues Its Online Critics as Posts Get Nasty and Personal, Wall St. J. Interactive Ed., Aug. 13, 1999 (available at interactive.wsj.com; Mary Francis, Lilly Industries Sues Net Critics: 5 Unknown Antagonists Are Spreading Rumors, Confidential Corporate Info on the Web, Firm Says, StarNews.com, July 28, 1999 <http://www.starnews.com/news/business/99/July/0728st_net.html>; Emily Kaiser, Lilly Sues Anonymous Internet Critics, NandoTimes, July 28, 1999 <http://www.techserver.com/noframes/story/0,2294,75202-118804-842597-0,00.html>.
(25) For an extensive list of corporate cybersmear cases, see Blake A. Bell, Corporate Cybersmear Cases, CyberSecuritiesLaw.com (visited Nov. 18, 1999) <http://www.cybersecuritieslaw.com/corporate_cybersmear_cases.htm>. For bibliographies of articles that address corporate cybersmears, see Blake A. Bell, Corporate Cybersmears Articles, CyberSecuritiesLaw.com (visited Nov. 18, 1999) <http://www.cybersecuritieslaw.com/cybersmear_articles.htm>; Bruce T. Carton, News Archive: Internet Message Boards, EnforceNet.com (visited Nov. 18, 1999) <http://www.enforcenet.com/EnforceNet/news_archive.htm#mb>.
(26) For more about "best practices" regarding the implementation of e-broker discussion forums, see Blake A. Bell, E-Broker Chat Rooms and Federal Securities Laws, 2(3) Wallstreetlawyer.com 1 (Aug. 1998) <http://www.simpsonthacher.com/memos/art013.htm>; Steven W. Stone, Broker-Sponsored Online Chat Rooms: Concerns and Best Practices (visited Nov. 15, 1999) <http://www.mlb.com/spc032499.htm>.
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