interactive.wsj.com
April 5, 2000
Overheard
Company Finds Surprise Critic Among Message-Board Posters
By AARON ELSTEIN
THE WALL STREET JOURNAL INTERACTIVE EDITION
A Miami company that has been relentlessly hammered by anonymous critics on the Internet has identified a surprising enemy among them: a trader at a securities firm that makes a market in its stock.
Quest Net says it has won a court order from a Florida state judge barring Jerry Rosen, a trader at J. Alexander Securities, from continuing to post "false and defamatory" statements about the Internet service provider. Mr. Rosen, the company contends, posted messages on a Raging Bull message board (www.ragingbull.com) under the alias "Cats3."
The court order, along with a confidential settlement with Mr. Rosen, is an interesting development in a cyberlibel lawsuit the company filed Feb. 17 against five of its message-board critics. It's highly unusual for a company to face criticism from among the ranks of its market maker. After all, the market maker maintains an inventory in the stock using its own money.
"Stock brokers have been named in past cases," says Blake Bell, a New York lawyer who tracks cyberlibel suits. "But this is the first time a company's market maker has been identified."
Market makers are responsible for maintaining an orderly, or liquid, market in a stock, standing ready to buy or sell shares even when no one else will. According to the National Association of Securities Dealers, J. Alexander, based in Los Angeles, is the seventh-largest dealer in Quest Net stock.
Mr. Rosen, who lives in Miami and consented to the court order, declines to comment on the settlement or the court order, which was issued March 23 by Judge Thomas S. Wilson. Quest Net's lawyer, Bob Pearce, also declines to discuss the case. "We have settled with Mr. Rosen and wish to move on," he says. James Alexander, president of J. Alexander, says the matter with Quest Net has been resolved and declined to comment further.
In its original lawsuit, Quest Net had named only one of the defendants, David Engel, a former marketing manager at the company who, according to the suit, was fired on Feb. 4. The other four were identified by their online aliases.
The company hasn't disclosed how it linked Mr. Rosen and Cats3. But companies usually identify anonymous posters through records subpoenaed from message board operators and Internet access providers. But even before the lawsuit an online poster had provided a lead, naming Mr. Rosen as Cats3.
Quest Net, which is losing money and disclosed in a recent filing with the Securities and Exchange Commission that it is in danger of going out of business unless it raises more money, says that it will proceed with the lawsuit against the other four defendants.
Quest Net's lawsuit, in general, alleges its online critics were short-sellers out to hurt the company's stock for financial gain. Short-sellers sell borrowed stock, hoping profit by replacing it with shares bought later at a lower price. The company is seeking unspecified damages and a court injunction ordering the defendants to cease their activities.
Shares of the company fell 22%, to 2 1/4 from 2 7/8 on the OTC Bulletin Board, from Feb. 5 to 17 -- during the height of the alleged cybersmear campaign and the eventual filing of the lawsuit. Quest Net shares traded as high as 52 1/2 in July 1998.
The company alleged in the lawsuit that Mr. Rosen, through the online alias Cats3, was actively involved in posting false, derogatory and hurtful messages about the company. Cats3 has referred to the company as a "dog" and has posted messages discouraging investors from buying its stock.
Cats3 posted a dozen messages about Quest Net from Jan. 21 to Feb. 28 on Raging Bull. One cited in the lawsuit suggested someone was trying to inflate the company's stock price. "Quit pumping this dog and get a real life," it said. "How much are they paying you to pump this stock????"
According to its most recent financial statements, Quest Net posted a loss of over $9 million, or 68 cents per share, on revenue of about $1.1 million for the 12 months ending June 30, 1999. Companies not listed on a national exchange, aren't required to file financial statements regularly.
David Ruder, a law professor at Northwestern University and former chairman of the Securities and Exchange Commission, says securities rules require industry professionals to get clearance from their employers before making comments to the public about stocks handled by their firms. Officials from NASD, an industry self-policing, didn't return phone calls Wednesday, and the SEC declined to comment.
Write to Aaron Elstein at aaron.elstein@wsj.com
KJC |
