Re: Guarding the Net; Companies alert to Internet stock chat
Guarding the Net
Companies alert to Internet stock chat
George Erb
Staff Writer
Gossip has new meaning for Glenn Welstad, chairman of Labor Ready Inc. On Aug. 19, rumors that apparently started on the Internet drove down the company's share price by 26 percent.
The Tacoma company hurriedly called a nationwide telephone conference and tried to debunk the tales. Welstad told worried investors, "Somebody out there is playing games."
As more investors log onto the Internet, rumors about public companies are spreading farther and faster than ever before, much to the dismay of executives and many shareholders.
In response, many corporations are monitoring relevant Internet sites and scrambling to contain the damage whenever a rumor disrupts the market.
"These rumors are just rampant on the Internet," said Dick Stern, president of Stern & Co. of New York, the investor-relations firm that advised Labor Ready. "Increasingly, things get spread very quickly."
One reason: More Americans are venturing into cyberspace. About 70.2 million adults in the United States are now using the Internet, according to Nielsen Media Research and CommerceNet.
The growth of the Internet has turned out to be both a boon and a bane to investors and publicly traded corporations.
The Internet empowered individual investors by giving them ready access to a wide array of information from credible sources. But the new medium also made it easier for people to start and spread rumors nationwide over a short period of time.
Many Internet sites provide so-called "chat rooms" for investors. Participants can shield their real identities and post information about a company in a relatively unsupervised forum.
Chat rooms can be lively. A Labor Ready chat room on Yahoo! contains thousands of posts, many from participants who talk freely about the company and each other, often in unflattering terms.
"It's created another information distribution channel," said John Snyder, a principal of the Snyder Buscher Group, an investor-relations firm in Seattle. "This is something that most publicly traded companies didn't have to deal with four years ago."
Sometimes the information posted in a chat room is correct. Many times it isn't.
Short sellers and other investors who would profit from a stock's decline may try to influence the market by starting rumors that reflect negatively on a company, say investor relations experts.
Short sellers borrow shares and sell them, hoping to reacquire the shares later at a lower price.
"Short sellers will spread absolutely false and malicious rumors, just to drive the price down," said Louis Thompson, president and CEO of the National Investor Relations Institute in Vienna, Va. "The Internet has been a wonderful device for them to do this."
Anyone who tries to influence the price of a stock by making a false and misleading statement runs the risk of getting sued by the company, investors and regulators, although that's rare.
Some observers are blaming short sellers for starting rumors about Labor Ready's accounting and hiring practices -- rumors that undercut the company's stock on Aug. 19.
The volume of short interest in Labor Ready stock was 1.3 million shares on Aug. 14, down from 1.7 million shares on July 15. The company has 27.7 million shares of common stock issued.
When the "bear wave" struck Labor Ready, nearly 8.8 million shares of the company's stock changed hands in one day.
During the company's conference call, Welstad had this to say about the people who started the rumors: "Some of us would love to go out and smack them, but that's not always the way to go."
Indeed, corporations and investor-relations firms have adopted a fairly uniform strategy for dealing with street rumors on the Internet.
Many companies and their investor-relations firms routinely monitor the discussions that take place on relevant Internet chat rooms, such as those found on Yahoo! and Silicon Investor.
But investor-relations consultants also tell companies to never respond to the claims that are made there, no matter how outrageous.
"We don't tell our clients to track down every chat room on the face of the earth. It's just not possible," said Jeff Howlett, a senior consultant at StreetConnect Inc., a Seattle investor-relations firm. "It's just simply not worth the effort to respond to all of those goofy questions and rumors."
The practice is widespread. A recent survey of 363 investor-relations executives nationwide showed that 98 percent of them never responded to false rumors on the Internet.
That's not to say that companies always stay silent, however. On occasion, a company will respond to recurring questions on the Internet by posting the answers on the company's own Internet site.
Unfounded rumors that burst out of the Internet with enough force to influence the stock market and get media attention often require an aggressive response. Labor Ready's reaction on Aug. 19 was a textbook example.
Labor Ready was unaware of the shellacking that its stock was taking until later that morning, when brokers began calling the company's headquarters.
When the rout became apparent, hundreds of calls poured in. Shannon Roberts, the company's spokeswoman, got 58 messages on her voice mail in 20 minutes. "It was rapid fire," she said.
Labor Ready quickly issued a press release that restated its strengths and arranged for a nationwide conference call with analysts, the media and investors. More than 400 people called in.
The company has so far succeeded in debunking the rumor and stabilizing its stock, albeit at a lower price. But the incident prompted Labor Ready to take some steps for the future, too.
Labor Ready is going to develop a crisis plan so that it is better prepared for any further incidents. And the company's board tentatively approved plans to shift the trading of Labor Ready's stock to the New York Stock Exchange from Nasdaq, which the company considers more volatile.
Said Welstad, who is also the company's president and CEO, "We need to position the company so that we have more stability in our market."
Copyright 1998 American City Business Journals Inc.
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