SEC Wants Tokyo Joe Case to Be Test for Tougher Web Standards
2/16/0 12:27 (New York)
with permission ....
(BTW steve he was not arrested, it is a civil case because the lack of violations of securities law)
Washington, Feb. 16 (Bloomberg) -- The Securities and
Exchange Commission wants to toughen standards for dozens of
Internet stock pickers by securing a landmark court judgment in
its fraud lawsuit against Web pundit Tokyo Joe.
``This will be a good test case,' SEC enforcement director
Richard H. Walker said.
Some legal experts, though, say the SEC's effort may violate
Tokyo Joe's constitutional free-speech rights. Tokyo Joe, in
distributing stock advice by e-mail to 3,600 paying customers, may
function like newsletter publishers entitled to First Amendment
protections, they said.
``This could be a difficult case for the SEC to win,' said
Barry Barbash, a Washington lawyer who was the SEC's top
investment-adviser regulator from 1993 to 1998. ``It will be a
tossup between principles of free speech and securities regulation
on the Web.'
If the courts decide that Tokyo Joe acts as a publisher
rather than an investment adviser, the SEC's case could be dashed
by a 1985 Supreme Court ruling that limited the SEC's authority to
regulate stock-advice newsletters. On the other hand, if the SEC
prevails, some Internet stock pickers may have to register with
the government as advisers and be subject to routine inspections,
said Barbash, a partner with the Shearman & Sterling law firm.
One Web stock pundit said that he would quit the business if
he had to register as an adviser.
``This is a labor of love, and if I have to be subjected to
all kinds of legalities, the game isn't worth a candle,' said
Charles Radomsky of Clifton, New Jersey, a retired broker who
picks stocks for the Daily Trader web site. Daily Trader charges
subscribers $19.95 a month.
Tokyo Joe
The SEC's civil-fraud suit, filed last month in Chicago
federal court, alleged that Tokyo Joe failed to disclose personal
trading of stocks that he recommended. It also contended that he
failed to disclose receiving free shares in exchange for touting a
stock, and inflated his advertised investment performance on 800
occasions.
Tokyo Joe, 50, one of the best-known Web pundits, is
contesting the charges. He can win on the SEC's claim that he is
an investment adviser but still incur a fine by losing on some
other portions of the suit. If that were to happen, the judge's
findings would have implications for Tokyo Joe alone, but not for
other Web stock pickers.
Tokyo Joe, whose real name is Yun Soo Oh Park, is the most
prominent Web operator and the first Internet stock picker to be
charged by the SEC in its 18-month battle against manipulation on
the Internet.
Walker said the SEC suit seeks to extend the agency's
authority over Internet stock pickers by exposing them to possible
prosecution for stock fraud. The SEC contends that Tokyo Joe is an
adviser who should be subject to the same anti-fraud rules as the
24,000 investment-adviser firms in the U.S., he said.
Internet Stock Pickers
``We're concerned about the proliferation of stock gurus who
charge investors for advice,' Walker said. The SEC has been
conducting a broad investigation of Internet stock pickers in
recent months, he said.
Tokyo Joe is one of at least dozens of Internet stock pickers
who provide advice to tens of thousands of paying and non-paying
customers, said John Stark, the SEC's Internet enforcement chief.
These pundits include electronic publishers, stock pickers who use
computer algorithms, and ``momentum traders' who try to generate
customer purchases of a stock they own and recommend, he said.
Tokyo Joe, a former owner of burrito restaurants and
condominiums who works out of his Manhattan apartment, said he
will battle the SEC allegations.
``Bring it on,' he said in an e-mail. ``I will fight to
(the) end.'
The SEC thinks Tokyo Joe is an adviser because he regularly
charges customers for stock recommendations, the basic definition
of an adviser found in the 1940 Investment Advisers Act, Walker
said.
Supreme Court
The legal benchmark for the Tokyo Joe case is the 1985
Supreme Court ruling that the investment adviser's law exempted
the publisher of a stock-advice newsletter from SEC oversight. The
high court said the SEC couldn't treat publisher Christopher Lowe
as an investment adviser, or stop him from printing stock tips,
because he gave only ``nonpersonalized' advice to general
readers.
In Tokyo Joe's case, the SEC will contend that the Web stock
guru offers more personalized advice through Internet chat rooms
that he runs, agency officials said.
Tokyo Joe charges as much as $200 a month to 3,600 members of
his Societe Anonyme club from 18 countries, including Russia,
Dubai and New Zealand. He said he has made about $10 million from
fees and investments in the last two years.
The Internet guru said he posts as many as 20 messages a day
on his TokyoJoe.com Web site, named after a London nightclub he
used to frequent. ``I never, never advise individually,' he said.
Columbia University law professor John Coffee said the SEC
theory ``is overbroad' in claiming all Web sites are investment
advisers. Many of these pundits don't make individual
recommendations tailored to a customer's portfolio, as traditional
advisers do, he said.
`Obsolete' Rules
The SEC, instead of pursuing a test case against Tokyo Joe,
should update its ``egregiously obsolete' rules, which don't
address Internet stock recommendations, said Coffee, who has been
a securities-law consultant to SEC Chairman Arthur Levitt and
President Bill Clinton.
Tokyo Joe's case presents unsettled legal issues as
regulators try to protect Internet investors in situations that
couldn't have been imagined decades ago when the Investment
Advisers Act was enacted. Today, investors can use Web sites, chat
rooms and e-mail alerts to get advice from self-anointed experts
such as Tokyo Joe, who posts his blunt and often insulting
recommendations on Web bulletin boards.
The SEC isn't alone in facing court fights over efforts to
make existing standards cover the fast-changing investment
landscape.
The Commodities Futures Trading Commission is appealing a
Washington federal judge's ruling last year that said the agency
violated the First Amendment by moving to make newsletter and Web
site publishers register as commodity trading advisers. Provisions
of the federal commodities law that were challenged in that case
contain similar language as the Investment Advisers Act.
--Neil Roland in Washington (202) 624-1868/bd |
