Re: SEC Commissioner Laura Unger Releases On-Line Trading Report
VII. ON-LINE DISCUSSION FORUMS
A. General Background
On-line discussion forums are a popular feature of the Internet. [211] At least three types of Internet "discussions" have evolved. First, numerous websites host discussion groups, or "chat rooms," with real-time postings and viewing by participants on a wide variety of topics. Other websites contain "bulletin boards," cyberspace message centers where comments concerning issuers, securities, industries, or any other facet of the markets can be posted and saved for viewing over an extended period of time. Finally, many websites offer moderated discussion forums, typically led by a real-time moderator and featuring a guest "expert."
Users have participated in these on-line discussions forums to, among other things: (1) educate themselves about investing by exchanging ideas with others or reading the discussion "threads;" (2) act collectively; [212] or (3) post information or opinions about an issuer. [213]
The defining characteristic of these on-line discussion forums is that they enable large numbers of geographically dispersed individuals to gather and communicate on-line on a real-time and largely anonymous basis. Besides certain common ground rules, each site imposes slightly different rules for participation. Some sites do not monitor users' participation, while other sites use volunteers as a sort of"neighborhood watch" patrol to maintain decorum and ensure topical discussions. Some sites charge a fee for posting but not for viewing. On some sites, users may post anonymously or register themselves under multiple aliases. Some financial sites do not permit discussion on certain securities topics. [214] On-line discussion forums can be found in America Online, Yahoo! Finance, Silicon Investor, TheStreet.com, Raging Bull, and Motley Fool, among others.
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211 - For the purposes of this section, "on-line discussion forums" include investment-related bulletin board systems, cyber message areas, newsgroups, Web discussion forums, and threads dedicated to talking about investing.
212 - See, e.g., Diana B. Henriques, Disgruntled Shareholders Unite, N.Y. TIMES, Apr. 27, 1999 at C1 (bankrupt company's shareholders discuss on-line representation in bankruptcy court); Alex Lash, Disgruntled IBM Workers Organize On-line, THE INDUSTRY STANDARD, Aug. 16, 1999 <http://www.thestandard.com/articles/display/0,1449,5938,00.html>.
213 - See, e.g., Ianthe Jeanne Dugan, Amateur Stock Pickers' Take on the Pros; Armchair Analysts Bring Predictions from Chat Rooms to New Internet Sites, WASH. POST, Oct. 11, 1999, at A1 (new site, iExchange, ranks amateur stockpickers in chat rooms); Doughnut Chain Buys Up Critical Web Site, THE ASSOCIATED PRESS, Aug. 27, 1999 (Dunkin' Donuts purchases a gripe site); Bank Rage Moves to the Web, BANK MARKETING INT'L., June 1999, at 13 (discussing popularity of bank gripe sites).
214 - See Paul Bart and Jennifer Tomshack, Can We Talk?, ON-LINE INVESTOR, Oct. 1999, at 33 (discusses features of on-line discussion forums).
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A number of commentators have observed that these forums are an important element in building communities of users in cyberspace. [215] While these virtual communities may be reminiscent of real-world communities, the ability of participants to speak from "behind the screen" without fear of repercussion poses serious challenges for regulators. Anecdotal evidence suggests that postings in on-line discussion forums have caused volatility in some stocks. [216] At the heart of the controversy over these on-line discussion forums is the fact that readers may find it difficult to differentiate among accurate information, "noise" (e.g., unsubstantiated opinions or rumors), or fraudulent misstatements. [217]
1. Broker-Dealer Sponsored On-Line Discussion Forums
a. Background
While financial on-line discussion forums abound on the Internet, broker-dealer sponsored on-line discussion forums where investors can exchange messages are rare. E*Trade is a significant exception. A.B. Watley, Inc. also sponsors an on-line discussion forum where investors can chat with "sales associates" and other investors. Some on-line discussion forums also hyperlink to broker-dealers. For example, Raging Bull and Silicon Investor both hyperlink to Datek Online
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215 - See generally JOHN HAGEL III AND JOHN ARMSTRONG, NET GAIN (1997) (discusses how merchants can expand markets by creating virtual communities); Neil Gross, Building Global Communities, Bus. WK. E.BIZ, Mar. 2, 1999, at EB 42.
216 - See, e.g., Kenneth R. Gosselin, CEO Fined in Web Case, Regulators Fault Way He Touted Firm, THE HARTFORD COURANT, Sept. 4, 1999, at D1 (CEO of telecommunications company fined after he posted messages anonymously on Yahoo! Finance); Gretchen Morgenson, Wild Rides on Stock Market Begin in Internet Chat Rooms, N.Y. TIMES, Aug. 21, 1999, at A1 (chat room discussions impact on share prices); Rebecca Buckman, SEC Studies "Momentum" Stock-Pick Sites On the Internet, WALL ST. J., Nov. 2, 1999, at C1 (discusses web sites popular with day traders and other investors); Short-Seller is Reinstated on Stock - Talk Web Site, WALL ST. J., Oct. 12, 1999, at C23.
Anecdotal evidence also suggests that short sellers may engage in "cybersmear" campaigns in online discussion forums to drive down the price of a security. The absence of restrictions on selling certain securities short may magnify the impact of"cybersmear" campaigns in these securities. To respond to this concern, the Commission sought comment in its recently issued concept release on the short sale rule regarding whether the NASD should extend the short sale restrictions to smaller capitalization securities. See Short Sales, Exchange Act Release 42,037 (Oct. 20, 1999), 64 Fed. Reg. 57,996 (1999).
217 - See, e.g., Company Blames Stock Drop on Net Rumors, ZDNET, June 3, 1998 <http://www.zdnet.com/zdnn/stories/zdnn_display/0,3440,2109614,00.html> (chat room rumor about SEC investigation of issuer simultaneously with share price decline).
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E*Trade's on-line discussion forum allows members [218] to discuss specific securities, categories of securities (e.g., Internet High Flyers, Active Trader, Beer Budget Investors, Long Term Investments) and industries, as well as general investment news categories. E*Trade also sponsors live events where users can engage in interactive conversations with event leaders.
A variety of federal securities law provisions may apply to on-line discussion forums. [219] Under the antifraud provision of Exchange Act Section 10(b) and Rule 10b-5 thereunder, the Commission has brought a number of enforcement cases that involved a component of posting in on-line discussion forums. [220] One of the most well-known
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218 - E*Trade requires only that an individual submit his or her name and address to become an E*Trade "member," (i.e., one need not open an account to become a member eligible to participate in E*Trade's on-line discussion forums). E*Trade's on-line discussion forums are subject to the following conditions, among others: (1) users must register; (2) users may only maintain one active registration at any time although E*Trade does not verify the name and address received from non-account holding members; (3) E*Trade's "hosts," who am independent contractors, keep conversations on point and stimulate discussion; (4) E*Trade does not consider itself to be a publisher or speaker of any information provided to users; (5) users agree that postings are not attributable to E*Trade; (6) E*Trade does not prescreen or edit messages although it may monitor them; (7) certain behavior is impermissible, including a) impersonating someone or lying about a user's affiliation, b) offering to buy or sell securities, or c) posting false or misleading statements; (8) members may not discuss securities for which E*Trade serves as an underwriter or selling group member and securities that are not listed on an exchange or Nasdaq NMS.
219 - For example, depending on the facts and circumstances, the Commission could bring an action under the antifraud provisions of the federal securities laws. The Commission could also bring an action against posters who violate the proxy solicitation rules. The Commission recently relaxed restrictions on communications in mergers and acquisitions, as well as updated and harmonized related disclosure rules. See Securities Act Release No. 7760 (Nov. 10, 1999), 64 Fed. Reg. 61,408 (1999). The Commission could also bring an action against a company that violates the prohibitions of Section 5 of the Securities Act of 1933 by sponsoring or engaging in conversation in an on-line discussion forum while in registration depending on what was said. A person giving advice in an on-line discussion forum also could be acting as an unregistered investment adviser. The Supreme Court held in Lowe v. SEC, however, that the publisher of a regularly disseminated securities newsletter containing nonpersonalized investment and commentary may fall within the exclusion from registration as an adviser found in Section 202(11)(D) of the Investment Advisers Act of 1940. 472 U.S. 181 (1985); see also, Taucher v. Bom, Civ. Act. No. 97-1711 (RMU), 1999 U.S. Dist. LEXIS 9304, June 21, 1999.
220 - 15 U.S.C. ' 78j (1999). Section 10(b) of the Exchange Act, and Rule 10b-5 thereunder, prohibits any person from employing any device, scheme or artifice to defraud; making any untrue statement of a material fact, or omitting to state a material fact necessary in order to make the statements made, in light of the circumstances under which they were made, not misleading; or engaging in any act, practice or course of business which operates or would operate as a fraud or deceit upon any person in connection with the purchase or sale of any security. The elements of a Commission action under Section 10(b) of the Exchange Act and Rule 10b-5 thereunder are: (1) a misstatement or omission; (2) of material fact; (3) made in connection with; (4) the purchase or sale of securities. The defendant must also act with scienter. Ernst & Ernst v. Hochfelder, 425 U.S. 185 (1976).
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actions involved a PairGain Technologies employee who posted a false message on a Yahoo! Finance message board that PairGain was being acquired by an Israeli company. [221] The posting was linked to a phony Bloomberg News Service page reporting the "acquisition." The price of PairGain stock rose 31 percent on heavy volume before the hoax was exposed. The stock then fell 20 percent.
Broker-dealers and their registered representatives may be held responsible for what they say regarding securities products and services when participating in on-line discussion forums. [222] These communications must comply with NASD Rules, including NASD Conduct Rule 2210 (Communications with the Public), and the federal securities laws. Rule 2210 generally requires broker-dealers to accurately describe any security or service offered, including material information, such as risks and cost. [223] With some exceptions, NASD members must provide a copy of the communication to the NASD upon request. [224] In most cases, firms must review postings made by registered representatives prior to use. [225] Depending on its content, firms also may have to file scripted material with the NASD in accordance with the requirements for sales literature
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221 - SEC v. Gary D. Hoke, Jr., Litigation Release No. 16117, 1999 LEXIS 781 (Apr. 21, 1999); see also, SEC v. Comparator Systems Corp., Litigation Release No. 14927, 1996 LEXIS 1510 (C.D. Ca. May 31, 1996) (defendants sold tens of millions of shares of Comparator stock while inflating assets on its balance sheet and misrepresenting ownership of fingerprint identification technology; shares increased 30-fold in three days and the market capitalization jumped to almost $1 billion overnight while investors were posting messages in on-line discussion forums); SEC v. Charles O. Huttoe, et al., Litigation Release No. 15571, 1997 SEC LEXIS 2421 (Nov. 25, 1997) (CEO of Systems of Excellence distributed approximately eleven million shares of unregistered securities to nominees under his control and issued misleading press releases to manipulate the share price; the shares were hyped in thousands of Internet postings); SEC v. Uniprime Capital and Alfred J. Flores, Litigation Release No. 16252, 1999 SEC LEXIS 1613 (S.D.N.Y. Aug. 13, 1999) (the Commission charged Uniprime and a president of a subsidiary with fraudulently touting a "major breakthrough" in treating HIV; the share price rose from $0.625 to as high as $7.95; Uniprime became one of the most discussed securities on Raging Bull, with 10,000 messages posted by Aug. 1999); see also, Timothy L. O'Brien, Stock Hucksters Thrive on the Web, N.Y. TIMES, Aug. 23, 1999, at A1 (discussing alleged Uniprime fraud). For a more complete list, including a brief description of the Commission's cases involving postings in on-line discussion forums, see Appendix 3.
222 - See NASD, Internet Guide for Registered Representatives <http://www.nasdr. com/4040.htm> [hereinafter Internet Guide].
223 - NASD Rule 2210, NASD MANUAL (CCH) (1999). See also Member Firms Seek Guidance on Public Appearances, NASD Regulatory & Compliance Alert (Sept. 1997)
<http://www.nasdr.com/pdf-text/rca0997.txt> [hereinafter Member Guidance].
224 - For other applicable rules, see Internet Guide, supra note 222; see also NYSE Rule 472, NYSE CONSTITUTION AND RULES (1999).
225 - See Member Guidance, supra note 223.
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and advertising. [226] Broker-dealers must supervise their registered representatives participation in on-line discussion forums. [227]
The NASD also has issued guidance for broker-dealers that hyperlink to other websites. [228] Among other situations, the NASD generally will not hold the member responsible for the content on a third-party website when a broker-dealer provides an ongoing hyperlink to that site. However, a member may not establish a hyperlink "to a site that the member knows or has reason to know contains false or misleading information about the member's products or services." [229]
b. Roundtable Participants' Views
Roundtable participants generally disapproved of broker-dealer sponsored on-line discussion forums. One roundtable participant acknowledged that broker-dealers may have an incentive to create on-line discussion forums for three reasons: (1) broker-dealers want to create a sense of"community" on their websites for marketing purposes; (2) broker-dealers want to retain users on their websites because, once users go to another website, they may lose business; and (3) if customers talk on-line just to other customers rather than to the public at large they may have more confidence in the speakers and believe that the site contains higher quality information.
Most of the broker-dealers who participated in the roundtables generally did not believe they should be sponsoring on-line discussion forums on their websites because of concerns about incurring legal or reputational risk. At one end of the spectrum, a participant stated that a broker-dealer sponsoring or associating with on-line discussion forums considers itself as nothing more than a conduit for information, similar to an ISP. [230] At the other end of the spectrum, a participant contended that a broker-dealer
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226 - NASD Rule 2210, NASD MANUAL (CCH) (1999).
227 - See Internet Guide, supra note 222.
228 - See Letter from Thomas Selman, NASD, to Craig S. Tyle, General Counsel, ICI (Nov. 11, 1997) <http://www.nasdr.com/2910/2210_01.htm>; see also, Ask the Analyst about Electronic Communications, NASD Regulatory & Compliance Alert (Apr. 1996) (broker-dealer should not hyperlink to websites that it knows contain misleading information about the broker-dealer's products or services).
229 - The Division of Corporation Finance is currently formulating an interpretive release for consideration by the Commission which may include guidance for issuers that hyperlink to other websites.
230 - An ISP is generally shielded from liability for defamatory postings in on-line discussion forums that it sponsors. After 1996, on-line discussion forums sponsors may be insulated for defamatory statements posted in their forums by the Good Samaritan provision of the Communications Decency Act of 1996.
Congress passed the Good Samaritan immunity in response to a court case that held Prodigy, an ISP, liable as a publisher for defamation because it exercised a degree of editorial control over the...
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sponsoring a bulletin board may be accountable for suitability determinations if any recommendations are made on that bulletin board. Another broker-dealer disagreed with this position, although it conceded that a broker-dealer that establishes and runs a bulletin board "owns it."
One on-line broker-dealer participant indicated that his firm has been considering where to locate an on-line discussion forum, assuming it decides to have one. He noted his firm's skepticism of on-line discussion forums is due to the lack of control over the information posted. He believes that basically two alternatives exist for firms: (1) put the on-line discussion forum within the firm's website so that only firm customers who log in can use it; or (2) place it outside of the firm's website so that anyone can read it. Currently, his firm favors placing it within its site to maintain some control and avoid having its name associated with potentially misleading information from an unknown origin.
The participants stated that they were unclear about the extent to which a broker-dealer would become liable for the content of information posted on an on-line discussion forum that it sponsors. One participant asked whether a broker-dealer that monitors an on-line discussion forum becomes liable for that information so that it assumes a duty to correct misinformation posted there. The participant then questioned whether the broker-dealer incurred any liability for failing to correct the misinformation promptly. He questioned what "prompt" would mean in cyberspace. For example, in the participant's hypothetical, would it be "prompt" if the broker-dealer took ten minutes to correct a posting that an issuer's projected earnings would be $10 a share when the broker-dealer's own research shows that they would be $5 a share?
2. Issuers
a. Background
Issuers have become increasingly concerned that on-line postings may influence their stock price. [231] Empirical research regarding the effect of postings in on-line
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postings on its service. Stratton Oakmont v. Prodigy, 23 Media L. Rep. 1794 (N.Y. Sup. Ct. 1995). But see Cubby, Inc. v. Compuserve, Inc., 776 F. Supp. 135 (S.D.N.Y. 1991) (held that ISP that did not exercise editorial control over the on-line newsletter where the allegedly defamatory statements appeared should not be held liable as a "publisher").
231 - Jerry Useem, !#&L% Day Traders: Feed 'Em or Freeze 'Em?' Which Tactic Hurts Investors More?, FORTUNE, May 24, 1999, at 318; Martin Stone, Internet Libel Suits Bedevil Canadian, U.S. Courts, NEWSBYTES PM, May 26, 1999 (Canadian court brings first case stemming from criminal libel for postings made on an Internet website); Blake Bell, Dealing with False Internet Rumors: ,,t Corporate Primer, WALLSTREETLAWYER.COM, Dec. 1998, at 1 (discussing techniques that corporations may follow for dealing with cybersmears); Broc Romanek, Employees as Shareholders in the Cyber Age, INSIGHTS, May 1999, at 15 (discussing techniques for addressing employees' use of on-line discussion forums); Richard Rapaport, PR Finds a Cool New Tool, FORBES, Oct. 6, 1997, at 100 (discussing public relations techniques in the age of the Internet).
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discussion forums, however, is scarce. One study evaluating the effect of misleading representations by sellers on buyer's behavior found that misrepresentations, or "cheap talk," allowed sellers to profit at the expense of buyers. [232] A draft study by a University of Michigan Business School professor provides the most insight into the effects of postings on on-line discussion forums. [233] His study finds a strong positive correlation between overnight message postings and next-day trading volume and stock price volatility. [234] A study that examined the information content of takeover rumors reported in the Wall Street Journal columns "Heard on the Street" and "Abreast of the Markets" found that the market tends to overreact to these rumors in moving the stock price. [235]
Not all rumors are inaccurate. A study that compared "whisper" forecasts to earnings per share forecasts from First Call, a commercial source of earnings forecasts, found that whisper forecasts were on average more accurate. [236]
So what should an issuer do? Correcting information creates potential liability but ignoring false or incorrect information could adversely affect the issuer's stock price. Right now, issuers generally take several approaches to addressing misleading postings, including: (1) ignore them; (2) monitor them or hire a firm to do SO; [237] (3) sue the
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232 - University students were given assets of varying quality (low, medium, or high) and allowed to engage in "cheap talk" before transaction prices were determined. Cheap talk in this setting involved the seller disclosing the truth, lying, or being vague about asset quality. For example, a seller with a low quality asset could state that it was either of a low, medium, or high quality, but could not state that it was only medium or high quality. The gains in this situation accrued wholly to the buyers. Efficiency improved when the sellers were prohibited from lying although they were allowed to tell the truth or be vague. Robert Forsythe et al., Cheap Talk, Fraud and Adverse Selection in Financial Markets: Some Experimental Evidence, 12 REV. OF FINANCIAL STUD. 3, at 481-518 (Spring 1999).
233 - Peter D. Wysocki, Cheap Talk on the Web.' The Determinants of Postings on Stock Message Boards' (1998) (Working Paper No. 98025. Univ. of Michigan School) <http://papers.ssrn.com/paper.taf?ABSTRACT_ID=160170>.
234 - Id.
235 - This study also suggests that a strategy of short selling after rumor publication may prove profitable. Terry Zivney et al., Overreaction to Takeover Speculation, 36 Q. REV. OF ECON. AND FIN. 1, Spring 1996, at 89-115.
236 - "Whisper" forecasts are unofficial earnings forecasts circulated before official company announcements. Mark Bangoli, et al., Whisper Forecasts on Quarterly Earnings' Per Share. 28 J. OF ACCT. & ECON. 1 (forthcoming 1999); Ed Leefeldt, Whispers', BLOOMBERG, Aug. 1999, at 28 (discusses accuracy of whisper numbers); Marcia Vickers, Psst! Want the CPI Number?, Bus. WK., Oct. 18, 1999, at 182 (discusses web sites that post whisper earnings).
237 - Rebecka Buckman, Gumshoe Game on the Internet, WALL ST. J., July 27, 1999, at B1 (companies are hiring detectives to unmask on-line detractors); Matt Ritchel, Rumor Brigade Scours Web, SAN DIEGO UNION-TRIB., Mar. 23, 1999, at 8.
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anonymous "John and Jane Does," to uncover their identities; [238] (4) correct the misleading statement where it originally appeared; [239] or (5) contact the SEC or appropriate SRO.
An issuer generally has no obligation to comment on rumors in the marketplace that affect its stock price unless the rumors are attributable to the issuer. [240] The same is true with respect to rumors on the Internet. Practitioners generally advise their clients to refrain from commenting on rumors, electronic or otherwise, regardless of the nature and extent of the rumor. Counsels' primary concern is that the company's response to a false rumor may result in a duty to correct or update the information at a later time. [241] In addition, an issuer that corrects misinformation in the same on-line discussion forum where it appeared may unintentionally selectively disclose material nonpublic information or provide inaccurate information which would serve as a basis for liability for those who acted on the incorrect information. [242]
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238 - See, e.g., Michael Moss, CEO Exposes, Sues Anonymous On-line Critics, WALL ST. J., July 7, 1999, at B 1 (CEO of HealthSouth Corp. sued a John Doe who claimed that he may be committing billing fraud and engaged in wife swapping); Neil Roland, M.H. Meyerson Sues Internet Users, Yahoo/Over Chat Messages, BLOOMBERG, May 20, 1999 (broker-dealer sued anonymous posters who accused the CEO of stock manipulation, insider trading, and money laundering); Kaiser, Lilly Industries Sues Anonymous Internet Critics, AP NEWSWIRES, July 20, 1999 (Kaiser Lilly); Banks Sue Over Internet Rumors, AP ON-LINE, July 28, 1999 (LEXIS, News Library, Curnws File); see also Columbia Ins. Co. v. Seescandy.com, 185 F.R.D. (plaintiff must meet a four part test in order to compel discovery of the true identity of an Internet tortfeasor). A group of John Does who have been sued have even established their own message board on Yahoo! to discuss their experiences. See <http://clubs.yahoo.com/clubs/johndoes?s> (visited Nov. 14, 1999).
239 - See, e.g., Michelle Leder, Stemming the Tide of Touts on Those Stock Message Boards, N.Y. TIMES., Feb. 21, 1999, at 9.
240 - See State Teachers Retirement Board v. Fluor Corp., 654 F.2d 843 (2d Cir. 1981).
241 - Some commentators have noted that there may be advantages to engaging in an ongoing dialogue with individual investors, such as: (1) providing greater access to the issuer, (2) strengthening ties with investors, (3) keeping investors informed, (4) countering any rumors or misinformation in the marketplace, and (5) keeping the issuer informed of investors' opinions. At least two issuers presently participate in Internet discussion groups with what they view to be positive results. See Kenneth Li, Zamba Exec Wants To Tell You What's New, THE INDUSTRY STANDARD, Sept. 27, 1999, at 54; Paul C. Judge, Internet Evangelist, Bus. WK., Oct. 25, 1999, at 140 (CEO of Internet holding company CMGI, Inc., discussed his company on Yahoo! Finance over a sixday period).
242 - At least one foreign stock exchange, the Toronto Stock Exchange, has issued guidance for issuers regarding the appropriate forum to correct rumors.242 This guidance urges companies to refrain from participating in on-line discussion forums to dispel rumors. Instead, it provides that the company should issue a news release to ensure widespread dissemination of its corrective statement.
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Under the federal securities laws, to the extent that an issuer posts factual material information on its website, the issuer may have a duty to correct or update. [243] Generally, however, there is no duty to correct statements issued by a third party unless the statements are attributable to the issuer. [244]
Still, the NYSE admonishes issuers that if rumors occur at a time when the issuer is considering significant corporate developments and the rumors are "false or inaccurate, they should be denied promptly or clarified. A statement to the effect that the company knows of no corporate developments to account for the unusual market activity can have a salutary effect." [245] SRO policies address how listed companies should disseminate material information to the public. For example, NYSE-listed companies are "expected to release quickly to the public any news or information which might reasonably be expected to materially affect the market for its securities" and "act promptly to dispel unfounded rumors which could result in unusual market activity or price variations." [246] The NYSE also requires its listed companies to disseminate press releases on material developments by the "fastest available means." [247] At a minimum, NYSE-listed companies must distribute press releases to specified major news services. [248] The NASD requires Nasdaq-
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243 - See, e.g., Ross v. A.H. Robins Co., Inc., 465 F. Supp. 904 (S.D.N.Y.), rev'd in part and remanded on other grounds, 607 F.2d 545 (2d. Cir. 1979), cert. denied, 446 U.S. 946 (I 980); Naye v. Boyd (CCH) 692,980 (W.D. Wash. 1986); SEC v. Shattuck Denn Mining Corp., 297 F.Supp. 470 (S.D.N.Y. 1968); Fischer v. Kletz, 266 F. Supp. 180 (S.D.N.Y. 1967). See e.g. Hilson Partners Ltd. Partnership v. Adage, Inc., 42 F.3d 204 (4th Cir. 1994); Evanowski v. Bankworchester Corp., 788 F. Supp. 661 (D. Maine 1991).
244 - "Related to the question of whether an issuer has a duty to correct or update its own statements is the question of whether an issuer has a duty to correct or update misleading statements made about it by third parties, such as by reporters or financial analysts. The nearly unanimous view of courts that have considered this question is that issuers ordinarily have no such duty."
Robert H. Rosenblum, An Issuer's Duty Under Rule lob-5 to Correct and Update Materially Misleading Statements, 40 Cath. U.L. Rev. 289, 291 (1991); see also Electronic Specialty Co. v. International Controls Corp., 409 F.2d 937 (2d Cir. 1969); Zucker v. Sable, 426 F. Supp. 658 (S.D.N.Y. 1976).
245 - NYSE LISTED COMPANY MANUAL ' 202.03 (1998). See also Rule 4310(a)(15-16), NASD MANUAL (CCH) (1999); AMEX COMPANY GUIDE (401-405).
246 - NYSE LISTED COMPANY MANUAL, supra note 245, ' 202.05.
247 - Id. ' 202.06(C). The NYSE and NASD provide non-exclusive examples of what news items should be considered to be material. See id. ' 202.06(A); Nasdaq Marketplace Rules' Update: Nasdaq Clarifies Rule on Disclosure of Corporate Information Over the Internet (Rule IM-4120O, NASDAQ-AMEX BULLETIN Apr. 1999, at 1.
248 - See NYSE LISTED COMPANY MANUAL, supra note 245, at ' 202.06(C).
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listed companies to promptly disclose any material developments through the news media. [249]
Issuers are growing increasingly concerned about employees posting company information in on-line discussion forums. One-third of companies represented by the National Investor Relations Institute ("NIRI") have adopted policies that prohibit employee participation in such forums. [250] Of those, two-thirds have enforcement mechanisms to address employee violations. More than one-half of the companies that have adopted such policies have done so within the past year.
b. Roundtable Participants' Views
One participant noted that most issuers are starting to monitor postings concerning their companies but that only three percent of issuers in his organization say that they will respond to rumors arising in on-line discussion forums. [251] His organization urges issuers not to respond to on-line discussion forum rumors because it is concerned about creating an ongoing duty to correct misinformation in on-line discussion forums. [252] However, he recognizes the difficulties of a "no comment" policy -- particularly for smaller issuers. He know of one recent situation in which an issuer learned that someone was posing as its CEO and making earnings projections in a on-line discussion forum. The issuer's counsel advised the issuer to deny the posting in the same on-line discussion forum by stating that the current poster was the real CEO and that the company, as a matter of practice, did not project earnings.
Several participants suggested that one way to reduce the potential for on-line hype about a company's stock is to require any person who posts information about a public issuer to register on the site under his or her true identity. At least one First
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249 - Qualification Requirements for Domestic and Canadian Securities, 1 NASD Manual (CCH), at 5273 (Feb. 1999). Pursuant to NASD Interpretation IM-4120-1, Nasdaq-listed companies should disclose material information in the form of a press release to one of the traditional news services. See NASDAQ-AMEX BULLETIN, supra note 247.
25O - NIRI, Electronic and Telephone Communications Systems Policy, July 1, 1999 <http://www.niri.org/publications/alerts/ea070199.cfm>
251 - This is consistent with a 1998 survey of corporate disclosure practices which found that 52 percent of companies do not comment on market rumors under any circumstances a |
