From the Wall Street Journal Online:
REAL TIME
By TIM HANRAHAN AND JASON FRY
The West Gets Less Wild;
Rosen's Grace Under Fire
You've likely never heard of Fred Moldofsky, but his sentencing last week provided an helpful reminder of how nutty the stock market got during the late '90s, aided and abetted by the Internet, and how much things have changed since. Mr. Moldofsky, a former day trader who now works in a Texas refinery, was sentenced to the two months he'd already served, plus six months of house arrest. His crime: posting fake news about then-highflying Lucent Technologies in March 2000, which happened to coincide with tech stocks' peak.
According to the Securities and Exchange Commission (which settled its case last August), Mr. Moldofsky went onto online message boards and posted several messages using the alias "kahuna_and_the_brain." At first, he merely reported rumors that Lucent wouldn't meet its quarterly earnings targets. (Kahuna and the Brain are the nicknames of CNBC's morning commentators.) That night, he took it further, and using the alias "hot_1ike_wasabe," he posted a message with the headline: "Lucent Releases Earnings Warning! Damn!" Attached was a phonied-up earnings warning from Lucent.
There is a big gray area as to what's legal or illegal in stock chat boards, which have always involved a lot of trash talking and suspect motives. But while the SEC will occasionally go after successful stock-board manipulators to send a message, like 15-year-old Jonathan Lebed, it generally leaves people alone. There are free-speech issues, and also a question of who exactly the victim is.
But Mr. Moldofsky, by creating and disseminating the fake press release, crossed a pretty unambiguous line. It was also too big a fish: While Internet scams have sometimes involved large companies, they are generally fairly obscure to the average investor -- Geron, Emulex and PairGain are three examples. But Mr. Moldofsky picked the most widely held stock in the country. Lucent was trading in the mid-60s, and dipped to just above $60 before recovering when the company disavowed the release. A lot of ordinary people took a hit. (Little did they know Lucent would later see its business collapse: Its stock now trades at about $2 a share. That is, people who sold on the bad "news" got out right before the bubble burst.)
In Mr. Moldofsky's sentencing, the judge also set a $4,000 fine to make it clear that "you can't have people posting messages on the Internet willy-nilly." That era is over, of course, and a fake posting today would draw a shrug at most. Last June, for instance, a 17 year old posted a made-up news article about a thinly traded company called Viragen, claiming it had received approval for an anthrax drug. The stock didn't budge. In fact, an SEC official said at the time, "We found no one who read the postings and believed them." The FTC tracked the teenager down in under two days, he confessed, and his dad, a minister, liquidated the account.
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