Alberta Stock Exchange ASE
Shares issued 0 1899-12-30 close $0
Monday Sep 28 1998
Also Crystallex International Corporation (KRY)
ALBERTA EXCHANGE SAYS 'NO' TO CHAT FORUMS
by Stockwatch Business Reporter
In an apparent case of punishing the messenger, the Alberta Stock Exchange has rejected an application from a junior capital pool hopeful -- the Internet-based financial information service StockHouse Online Journal -- because its website hosts stock chat forums.
Officials at StockHouse, a unit of Vancouver-based Berwick Management, had structured the company to go public via the ASE junior capital pool route and had been in discussions with the ASE since early May. In September, exchange officials advised the company to look elsewhere.
StockHouse promoter Chris Livadas says the ASE turned it down because the exchange plans to introduce a policy against applicants that carry investor forums. StockHouse has since turned its attentions to high-tech-friendly Nasdaq, where Mr. Livadas says it is getting a much warmer reception.
According to the promoter, StockHouse lawyers advised the company if it wanted to continue pursuing an ASE listing it would be obliged to either "remove the forums completely or screen every message that comes through," thereby ensuring it meets exchange regulations regarding the dissemination of insider information.
"It is impossible for forum hosts to police the forums," Mr. Livadas complains. "In regards to this issue, I feel the responsibility falls on the listed companies to curtail rumours and inside information, regardless of where it is."
Mr. Livadas contends forum hosts are no more responsible for what is carried on their discussion groups than telephone companies are responsible for what is said on their lines.
The ASE acknowledges concern about the dissemination of insider information led to it dissuade StockHouse from pursuing its ambition of joining the ASE's junior capital pool. "There is some accuracy to that," says ASE executive vice-president Gerry Romanzin. "We looked at a few issues with StockHouse and the main one was the chat room. From a policy perspective we are uncomfortable with listing a company that is a chat room."
Mr. Romanzin adds the Alberta Securities Commission supports the ASE's decision.
StockHouse is, of course, more than simply a chat room. Established in 1995, it specializes in news and views of emerging and blue-chip companies in North America, including pay-per-view comments about particular stocks from a variety of newsletter writers and financial news.
The chat-room function is, however, central to StockHouse's marketing pitch, which involves surprising claims of 150 million "hits" per month from over 150,000 consistent users. Its website, it says, hosts more than 19,000 separate company forums, (most of them chat-free), as well as the "largest active discussion group on the Net," which it does not identify.
StockHouse is just one of a stampede of financial-information companies that hope to become major players on the Internet. In 1998, major Internet-based stocks that carry this kind of information have done extremely well, including go2net, which owns Silicon Investor, and Geocities, which doubled in price on the first day it listed, Aug. 11. Other listings such as Yahoo!, which also deals with non-financial information, have done extraordinarily well. Lately, however, the sector has experienced price declines.
Fans of these financial sites believe tuning into these chat forums may provide investors with a leg-up on information -- be it official or unofficial, truth or fiction. For example, the Internet emerged as a key source for the Bre-X Minerals rumour mill while its stock gyrated on conflicting information emerging from Indonesia, Bre-X headquarters in Calgary and New Orleans, where Freeport Mcmoran Copper & Gold is based.
The bottom line for investors is: fact or fiction, they want to hear it all, and they are happy to make up their own minds about which is which, Mr. Livadas argues. "The primary use of message boards by investors is to gain an edge," he says. "One could call it the power of networking."
Mr. Romanzin says the ASE took its cue on the admissibility of StockHouse from the Toronto Stock Exchange, which has issued guidelines on the use of electronic communications. "Having looked at that, and the issue of chat rooms, the question is, If you have listed companies involved in chat rooms, should you be listing a company in which that's one of the prime businesses? -- especially if insider information is involved," says Mr. Romanzin.
"We are looking at the TSE requirements and we're going to make a decision fairly quickly as to whether we're going to adopt those decisions or not," he adds. "We wanted to give StockHouse a heads up that it didn't look like it was going to work."
While cautionary, however, the TSE's guidelines do not stipulate that Internet financial-information companies are in any way discouraged or disallowed from being listed on the exchange. They do not even mention any special considerations for such operations.
The paper, "Proposed electronic communications disclosure guidelines", discusses such matters as how member companies should react or deal with hype and rumour on the Internet, as well as the advisability of establishing and maintaining an official website, and what such websites should or should not contain. Essentially, the same standards and regulations that apply outside the Internet to these matters is applied to the Internet; the only difference is the medium on which the information is carried.
As close as the TSE guidelines come to the matter of chat rooms is the following: "A company should prohibit its employees from participating in Internet chat forums or news groups in discussions relating to the company or its securities." This stipulation is an understanding nod in the direction of anonymous posting handles and the possibility of misusing this anonymity; few, however, would say it offered to companies anything they were not aware of already.
While Mr. Romanzin takes direction from the TSE's guidelines, the TSE itself says chat forums may not be a particular problem for applicants or already listed companies that host these discussion sites. Further, says TSE official Cecilia Williams, the guidelines are at this point simply guidelines and not rules, and so far as she knows the exchange is not planning to take as hard a line as the ASE. "We don't intend to regulate them at this point," says Ms. Williams, director of regulatory and market policy. "It is not the TSE's intent at this time for this to be part of a listing review."
The TSE's guidelines, which can be found on the exchange's own website, are open to input from the public and interested parties until Oct. 31.
Mr. Romanzin acknowledges the ASE's decision may prove controversial because many will argue that Internet and chat-site guidelines should not form the basis for preventing a prospective listing from going public but rather should remain as part of any listed company's routine vigilance against hype and rumour.
"It's a tough one because it's kind of a public-interest matter," he says. "Do you generalize because there have been some abuses with certain chat rooms? Or is it guilt by association because the company is dealing with an area that's considered aggressive?"
Mr. Romanzin stresses, however, that neither the ASE nor the commission have actually banned companies that host chat forums. "What we said (to StockHouse) was we were looking at the area and it looks like something we would come up with a position on," he says. "It's a sensitive area, and they would be right in the middle of it."
Chat forums is an area of the securities business that is controversial and bound to become more so in the future as more people log on and more hypsters of both the long and short variety gain a greater understanding of how to use and misuse this potentially powerful medium. While there is nothing new about promoting stocks, in the past it has been done over the phone (often from boiler rooms), which leaves no embarrassing trail for stock exchanges to fuss over.
In recent months, several companies have become embroiled in nasty public brouhahas concerning what is said in these sometimes raucous discussion sites. Probably the most famous Canadian case was Philip Services, a TSE-listed waste-management company based in Hamilton, Ont. that has dropped from a 52-week high of $27.30 to its close on Friday at $1.54.
During its plunge, Internet posters had much to say about the company, most of it uncomplimentary. In July, Philip said it was so concerned about the negative and libellous comments made on the Internet -- comments both about the company and its officers and employees -- that it secured a court order that obliged the forum host to reveal the identities of a number of anonymous posters. In a court statement, Philip claims vague and explicit threats were made against its officers, including identifying their addresses; the young children of vice-president Lynda Kuhn were discussed at least once. Explicit death threats included such statements as "The bullet is looking for your head."
On Sept. 18, Calgary-based gold explorer Hampton Court Resources issued a statement warning investors about false information being distributed on chat-site forums. The problem had been going on for more than a year, according to a Hampton spokesman.
Immediately following the Hampton statement, a frequent poster by the name of "King-of-Kings" bad farewell to StockHouse's Hampton discussion forum.
In contrast to Philip's problem, which involved attacks on the company, Hampton's concerns involved hype and insiderish comments by its supporters. King-of-Kings was the dominant poster on the thread, posting always upbeat and often in-depth reports on the goings-on at and speculation about the company.
On July 15, King-of-Kings posted: "The rumour on the street is that there's going to be some heavy buying of HCR shares over the next few days and whoever is buying has the intention of taking out all the stock that's for sale -- all the way up to over $2." (HCR closed at $1.57 on July 15; it closed on Monday at $1.06.)
What prompted Hampton officials, however, was the distribution of false information about the company's gold exploration in Ecuador. King-of-Kings stated the company's Ecuadorian properties contained 2.5 million ounces of gold, adding that would mean HCR was a $10 stock.
Hampton's cautionary press release stands in contrast to what TSE- and AMEX-listed Crystallex International allowed to pass without official denial. StockHouse's Crystallex site was one of the liveliest forums anywhere, and for 52 weeks it was the home-away-from-home of the mysterious KRY super-supporter "Avalon", who posted around 3,400 tips, touts and rumour-mongering 'discussions about the company between June 1997 and June 1998.
Routine were seemingly serious discussions about KRY, generally a $6 stock during the time, soaring to $50 or $60 on the strength of winning a court case that involved the mineral rights for Placer Dome's Las Cristinas 4 & 6 deposits in Venezuela. A standard sentiment on the forum was that in the worst-case scenario Crystallex shareholders would win: Even if Crystallex lost the court case, the logic went, it would still hold title to the property. If that was not encouraging enough, there was the ever-present word that Caracas was planning to force a joint venture between KRY and Placer.
As a result, the collected wisdom on the forum had it that, "At worst, we win," a slogan coined by a poster named "Teddie," quoting a lawyer named James L. Ebersohl who lives in Illinois. Added the lawyer, "PDG SAY GOODBYE TO VENEZUELA," followed by seven exclamation marks and his name.
Another rumour had it that Placer, knowing it would lose the court case, had made an unofficial offer to KRY management of $23 a share to test the reaction. Avalon offered his thoughts on the matter on September 26, 1997 with his cleverly mixed characteristic cocktail of adolescent humour, support for other optimists, and digs at the hated Placer.
"Your friend is correct," Avalon wrote on Sept. 26. "There has been pressure from the government for a joint venture. I'm okay with that as long as the deal gets us mucho more than $23 a share, AND we get to sign (Placer president) John Willson's pink slip. Hey, if we all hold 10 per cent of the outstanding shares, I think we deserve MUCH more. Sorry for the numerous 30-second posts. I'm just a LITTLE excited right now."
Often it appeared as though scarcely a day would go by without upbeat insiderish information being offered for discussion and eventual distillation into a body of knowledge that was at once both rife with errors and jealously guarded as the irrefutable truth.
Avalon claims to be a former employee of Canada Trust in Toronto named Clive DeSouza, but the company was unable to verify that Mr. DeSouza, a financial-products salesman, had the means to post an average of almost 10 messages to StockHouse daily -- plus do a considerable amount of research work. Avalon, while refusing to discuss the issue of his identity with the news media, also was the author of libels against identifiable individuals.
Beyond Avalon, StockHouse's KRY site was host also to a number of persistent touts, such as a disgraced Vancouver broker, a broker with a major company based in New Jersey, and a couple of hyped up lawyers in the U.S. Sceptics would come and go, and usually made their exists expressing amazement at the hostile treatment they received.
The site also boasts a Caracas-based Internet journalist whose resume does not stand up to scrutiny, Roy Carson, who bragged he knew the outcome of the supreme court case (it did not go in Crystallex's favour, as he had claimed it would, and the stock subsequently crashed when the court's decision was made). Mr. Carson managed, however, appeared to have easy access to Crystallex management and who correctly predicted director Robert Fung's ascension to board chairman five days before the official announcement.
StockHouse hosts Mr. Carson's website.
For its part, Crystallex has never issued a statement cautioning investors about misinformation on its forums. In fact, at the company's annual general meeting it was generally acknowledged by both management and investors that the Internet forums were, if not a good source of news, then at least a good source of entertainment.
In spite of Mr. Livadas' protestations against monitoring chat sites in order to satisfy the ASE, StockHouse does, in fact, supervise and take action concerning statements made on its chat threads. For instance, a Stockwatch reporter was suspended for three days for questioning Avalon about apparent inconsistencies regarding his identity claims and was later threatened with suspension for posting Stockwatch's summaries of historical items from Mr. Carson's e-mail service.
The reason given by StockHouse management for the suspension was that Mr. Carson's e-mail service is copyrighted. (These summaries from Mr. Carson's library of Crystallex-related e-mail transmission are, in fact, copyrighted by Stockwatch and can be found in Stockwatch's KRY data base.)
A Stockwatch reporter was also suspended from posting on Silicon Investor's KRY site, again the reason being that Stockwatch's summaries were copyrighted by Mr. Carson. In the normal course of events, material from the Financial Post, Stockwatch and other publications is routinely copied verbatim onto various forums without any action taken.
Mr. Carson was an early participant in the StockHouse KRY thread, who before the Venezuelan Supreme Court's decision of June 11 had a considerable group of adoring supporters. Unfortunately for Mr. Carson's stature and for those who followed his advice, his earlier predictions of a Crystallex victory did not transpire.
In July, many of StockHouse's KRY posters left in a huff to join another KRY chat site, The Raging Bull, after StockHouse refused to put in place an "ignore" button, so as to switch off posters whose comments others do not like.
All of this may have a bearing on the ASE's attitude toward companies that host chat forums.
The bottom line may be that when parties have their posting privileges lifted by forum administrators, and when administrators clearly become involved in the editing process, it becomes more difficult for these on-line publishers to make the case that it is impossible for them to supervise, arbitrate disputes, patrol and even police their sites.
Even the value of chat lines as a medium of information exchange is open to debate. Ideally, small investors exchange information and thoughts and mull over the complexities of the market and the stock in question, possibly helped by people who clearly identify themselves if they have a connection to the company in question.
That, however, appears to be a Holy Grail unlikely to be found in a chat site where a stock rises and falls on the strength of its rumours.
Astute market observer and on-line critic RealityCheck, who maintains both his anonymity and credibility, wrote a scathing editorial about what transpired over 52 weeks (June 1997 to June 1998) when the StockHouse Crystallex discussion site was in its prime.
"Any argument that didn't support Crystallex could be classified as having 'no merit' and posters with whom one disagreed could be accused of being a shorter, spy or Placer crony and therefore subjected to whatever verbal abuse the accuser wished to direct at them," RealityCheck writes. "Given the environment of the Crystallex thread, the hypesters, promoters and those who may have been intent on deliberately misleading investors had free reign to advance the most specious arguments and outrageous speculation."
He continues that many of the grand plans that were supposedly in Crystallex's near future, such as the notion that the government was planning to make the company a regional resources powerhouse, were enough to "make a Tom Clancy novel look like a child's bedtime story."
While insider and incorrect information, hype, libel, death threats, and nonsense from lawyers is bad enough for both the company's and the industry's image, the ASE for one appears to not want to be associated with the unpleasant realities of a free and largely unregulated exchange of information and tips.
(c) Copyright 1998 Canjex Publishing Ltd. canada-stockwatch.com
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