Online hype muscling stocks
Internet chat forums are a new force in stock prices
May 24, 1996
Web posted at: 7:20 p.m. EDT
From Correspondent Katharine Barrett
NEW YORK (CNNfn) - Diana Corp.'s stock jumped 5-3/4 on Friday, closing at 103-1/2 -- just another chapter in a two month rally.
Ironically, there's been no significant news on the company, a meat and fish distributor and telecommunications equipment maker. However, there has been a lot of buzz about it on the Internet.
Diana is merely the latest stock to benefit from this kind of online hype. So far this year, Zenith Electronics, Guardian Financial Services, disk drive maker Iomega Corp., and digital imaging company Presstek Inc. have all been affected by online talk.
Online stock services and news groups are becoming increasingly popular. These open forums give everyone a chance to sound off on their favorite or most hated stocks. But there is a problem: Most people use special online aliases, so there's no way of really knowing who's talking, and why.
Getting stock tips from the Internet is popular but it may not be smart. Online investment forums certainly have the muscle to move stocks. Shares of computer equipment maker Zytec, for example, fell 20 percent when America Online's Motley Fool investment forum pulled Zytec from its model portfolio.
Securities regulators fear the Internet is defenseless against market manipulators. Cyberspace provides a cloak of anonymity which worries former Security and Exchange Commission attorney Theodore Sonde, now with Dechert Price & Rhoads. (171K WAV) or (171K AIFF)
Most people agree that online chat groups are vulnerable to stock fraud. It's harder to find consensus on how big the problem is and what to do about it.
"We can't censor people, so we can't limit what the conversation is going to be. That said, I think what's happening right now on the online medium that isn't getting covered by the media is its self-policing, that if you put up bad information it's immediately responded to." said Tom Gardner, co-founder of the Motley Fool.
Motley Fool, one of the most popular stock chat sites, posts a disclaimer saying that since users don't have to identify themselves, people should not rely exclusively on tips they see online.
Securities lawyers say existing laws cover online stock fraud but should be strengthened by requiring anyone who mentions a stock online to give their real name and relationship to the company.
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