October 20, 2000
Heard on the Street
Legal, Illegal Activity Line
On Internet Grows Blurry
By RUTH SIMON and MICHAEL SCHROEDER
Staff Reporters of THE WALL STREET JOURNAL
On Aug. 18, a none-too-subtle -- but all too familiar -- message appeared
on the Silicon Investor Web site touting shares of Internet Business's
International Inc., a small money-losing company whose stock symbol is
IBUI:
"The FEMPS 'Play of the Day' is IBUI here at .21 ... A fa$t 50%'er to .30
by Tuesday ... Its FAST and EAAAAAAAAAAAAAAASY
MONEEEEE!!!"
Nothing newsworthy happened to the company that day. But the stock
spiked nonetheless, climbing from 19 cents to 41 cents a share on sharply
higher trading volume, before falling back.
So far the posting, by someone using the screen name Tracy Moore,
appears to have passed unnoticed by regulators. But similar online postings
led the Securities and Exchange Commission on Sept. 20 to charge
teenager Jonathan G. Lebed with fraud.
Telling the difference between what's legal and what's not has always been
tricky, and it's getting more complicated in the Internet age, where opinion
and fact and hype are combined in a volatile mixture. The Internet
"amplifies the fuzziness because there is so much chitchat," says Alan
Bromberg, a professor of securities law at Southern Methodist University
in Dallas. "You've got anonymity and glibness and mixed motives, and all
the uncertainty that goes with it."
Why is it, a lot of investors wonder, that the same sort of advice that's
commonplace on Wall Street is sometimes considered problematic on the
message boards? Analysts at Wall Street firms, for instance, issue "buy"
recommendations on a stock, sometimes along with specific target prices,
at the same time other arms of the firm sell shares in the company. And
why do regulators sometimes turn a blind eye to specific Internet chat
rooms that actively seek to run up stocks by posting hundreds of rapid-fire
messages urging investors to buy, and then advise their fee-paying
members to sell and get out before the stock falls?
One thing is obvious to almost everyone who
studies the stock market, and especially to
those who visit Web sites for individual
investors: There's plenty of hype that seems to
cross the line. "There are a lot of cases where
a suit could have been brought and just
wasn't," says Howard M. Friedman, director
of the Cybersecurities Law Institute at the
University of Toledo. Due to limited
resources, he says, regulators "have to be
selective."
When the SEC snags stock manipulators,
charges are generally brought under a fraud
statute enacted by Congress in 1934 in part to
rein in questionable activities like those that
helped trigger the 1929 market crash. The law
makes it illegal "to use or employ, in connection with the purchase or sale
of a security ... any manipulative or deceptive device ..."
Securities lawyers note that there's plenty of activity that looks
manipulative, but isn't illegal. Some Internet messages aren't a problem
simply because no one believes them. Web postings that tout a stock as
the "best buy" or "THE stock to hold now" aren't against the law if they
truly reflect an investor's beliefs.
Defining "deceptive" can be tricky. "It's all about whether these false
postings in any way contain enough information that a reasonable person
would rely on, or if it's just puffing," says Georgetown University law Prof.
Donald Langevoort. A complication is proving intent. It isn't easy to
produce evidence showing that someone who hypes a stock was aware
that his action would deceive investors.
But many messages, like one on Aug. 18 touting Internet Business's
International, seem intended to pump up the price of the stock. That
posting was one of scores made on the Silicon Investor Web site by
someone using the name Tracy Moore. Tracy Moore didn't respond to
repeated messages sent via Silicon Investor.
The underlying strategy, however, seems apparent from a Tracy Moore
posting on May 21, 1999: "ALERT! 'The FRONTRUN WITH THE
FEMPSTERS' contest ... After HUGE WINS with HTSF and JAWZ,
FEMPSters are looking to set up another 'unofficial' Shareholder Cartel at
another stock. ... Anyone who has a recommendation can Private
Message me and, if we select that stock, can 'frontrun with the FEMPsters'
before the 'Unofficial' Cartel is officially announced ..."
Richard Walker, the SEC's director of enforcement, says the messages
look like the kind of thing the SEC might want to look into.
Other activities that perplex some investors occur in cyber-sites like
trading-places.net, an Internet chat room run by Trading Places Inc. in
Niles, Ill. The company often issues more than 100 "alerts" each day.
Messages proclaiming "A MONSTER CALL!!!" or "PULLBACK
ALERT" encourage investors to jump into selected stocks, then take
profits before the prices of those stocks fall.
Chris Rea, the company's founder and chief executive whose message
board was the subject of an earlier Wall Street Journal story, says his
actions can't be compared with Mr. Lebed's because the owners of
Trading Places don't profit directly from the alerts.
But Mr. Rea acknowledges that Trading Places alerts can "drive the stock
up. ... If we do manipulate a stock, it's for the benefit of the trader that's ...
buying and selling the stock," he says. Trading Places was the subject of an
SEC "inquiry" last year, but Mr. Rea says he hasn't heard from federal
regulators since last fall. The SEC determined "neither I nor any owners in
this company had any trading accounts" and thus weren't directly profiting
from the alerts, he says. But the owners of Trading Places do profit
indirectly from the $299.95 a month fee it receives from customers for its
service.
The SEC's Mr. Walker declined to comment specifically about Trading
Places. He says that the SEC sees "throughout the Internet chatter about
how this is a good stock and this is a good buy, that type of thing. Absent
some kind of manipulative conduct, it isn't illegal."
Mr. Walker adds that this is "very different from a person with an intent to
influence the purchase and selling of securities on a completely artificial
basis with no reference to fundamentals -- that's what we're looking for."
The SEC has filed a complaint against stock-trading guru Yun Soo Oh
Park, better known to cyber investors as "Tokyo Joe," charging him with
defrauding subscribers to his Web site. The SEC alleges he engaged in
illegal touting and lying about his performance record. Mr. Park has denied
wrongdoing. "One of the main issues in this case is, does someone who
goes on the Internet purporting to give investment advice ... have a duty to
anyone," says his lawyer, Ira Lee Sorkin.
It isn't only the actions of individuals on message boards that raise
eyebrows. Analysts at Wall Street firms sometimes issue buy
recommendations on stocks at the same time the firm is selling the same
stock. On June 5, for instance, Goldman Sachs Group Inc. analysts Jamie
Friedman and Thomas Berquist reiterated their rating of FreeMarkets Inc.
as a "trading buy," one of three terms Goldman applies to stocks it
considers a buy. FreeMarkets shares climbed $4.25 a share to $54.75 the
day the report was issued.
Just two days later, Goldman filed documents with the SEC indicating that
it intended to sell part of its stake in FreeMarkets on or about June 7,
when a lock-up barring insider sales of the stock expired. Goldman filed to
sell additional FreeMarkets shares July 31, six days after it reiterated its
"trading buy" rating.
"Investment research and our principal investment activities act
independently of each other," says a Goldman spokeswoman. "Each
adheres to strict firmwide and business-specific guidelines and prohibitions
surrounding market transactions."
Mr. Walker says the SEC hasn't brought any cases in which firms
fraudulently traded based on advanced knowledge of analysts' reports. He
says firms must maintain "Chinese walls" to prevent traders from acting on
an analyst's call before it is made public. But he adds that proving that an
analyst and a firm acted "in concert ... would be very difficult."
Securities-law experts agree it is tough to prove "intent" in such situations,
but that doesn't mean there aren't conflicts of interest. "Analysts don't work
in total isolation," says Mr. Bromberg.
Perhaps fortunately for regulators, many people just cave and agree to
disgorge their profits when confronted with an allegation of manipulation.
Former SEC associate enforcement chief Bruce Hiler says the SEC could
have a potential problem proving in court that Internet posters have a duty
to readers of their messages and that saying something false necessarily
constitutes market manipulation. "Somewhere down the line [regulators]
will be tested," he says.
A defendant who fought a case might be able to win in court, lawyers say,
both because of the murky nature of what constitutes manipulation and
because securities laws weren't designed for the world of the Internet. "The
law focuses on the impact of the reasonable person," Prof. Langevoort
says, "while the SEC is living in a world of day-traders and five-minute
pops. That probably doesn't conform to the courts' image of reason and
rationality in the world of investments."
Write to Ruth Simon at ruth.simon@wsj.com and Michael Schroeder at
mike.schroeder@wsj.com |
