Mr. Rob,
You may find this of interest;
Monday, February 9, 1998
THE RAPIDLY INCREASING commercial use of the Internet raises unanticipated
issues under the federal securities laws. Although the law is relatively undeveloped,
certain features unique to electronic communication may have an impact on issues
involving insider trading, stock manipulation, the duty to correct public misinformation,
liability for analysts' reports, and unregistered sales of securities
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Outsider Manipulation
Manipulation of stock prices by outsiders, particularly of smaller companies in volatile
industries, is another danger posed by the new electronic media. It arises from the
potential for outsiders to pose as insiders online to lend credibility to their information.
For example, a manipulator who holds a short position in a stock may use the
Internet, particularly chat rooms and bulletin boards, to start rumors
disparaging the company in an effort to depress the price and to profit from the
short position. SEC Commissioner Steven M.H. Wallman has expressed concern
that "there may have been insiders who have been trying to manipulate stocks" through
chat rooms and that such discussions can "move the market as they seem to have
done" in some cases.11
The Exchange Act contains a provision making it unlawful for any person--alone, with
others or through agents--to manipulate the prices of securities by disseminating false
information about a possible rise or fall of prices.12 Companies and regulators,
however, would face several disadvantages in enforcing the securities laws against
manipulators who use the Internet.
First, it is technologically difficult, and in some cases impossible, to track the source of
rumors in chat rooms or on bulletin boards.13 Second, it may be difficult to prove
traditional or misappropriation theories of insider trading, because the manipulator
likely violates no duty, fiduciary or otherwise, in disseminating the information. Third,
the Exchange Act's antimanipulation provisions are limited to securities registered on
national exchanges, and thus may be inapplicable to manipulations directed against
smaller growth companies.
Therefore, companies may need to rely on alternative methods of enforcement, such as
unfair competition or defamation laws, to obtain redress. Indeed, several lawsuits
taking such courses of action have been initiated.14
(11) Securities Regulation & Law Report, Vol. 28, June 14, 1996, at 751.
(12) See 15 U.S.C. 78i(a)(2)-(3) (1994).
(13) See Joseph J. Cella and John Reed Stark, "SEC Enforcement and the Internet:
Meeting the Challenge of the Next Millennium," The Business Lawyer, Vol. 52, May
1997, at 826 (discussing methods of manipulating stock by disguising authors' true
identities, either by "spoofing" the e-mail identification of a corporate insider or by
making their addresses anonymous).
(14) See, e.g., Presstek v. Lustig, Civ. A. 97-463-M (D.N.H. 1997) (complaint filed
by a company, alleging that the defendants tried to manipulate stock prices by posting
on the Internet derogatory statements about the company's financial strength so that the
defendants could sell short the stock, stated claims for defamation and unfair trade
practices).
I was PM'd this interesting piece. I thought I would share it with you. I do recall PRST and Mr. Lustig...very interesting indeed!
RB |
