DJ Internet Chat Rooms Concern Regulators, Companies
By Judith Burns
WHITE SULPHUR SPRINGS, WEST VA.(Dow Jones)--Loose lips don't sink ships
anymore, but they can knock down a company's stock or send it soaring by
spreading rumors on Internet chat rooms and electronic bulletin boards, a
fact that concerns securities regulators.
"Chat rooms of the 1990s increasingly look like boiler rooms of the 1920s,"
New York Stock Exchange Chairman Richard Grasso told the American Society of
Corporate Secretaries, meeting here over the weekend.
Addressing the same group, Securities and Exchange Commissioner Laura Unger
said the issue of chat-room rumors "is something we will be focusing on" at
the SEC. She stressed that her remarks reflect her own views, not those of
the Commission.
"The Internet is probably our best dream and our worst nightmare," as
regulators of U.S. securities markets, Unger commented. Among the benefits,
she said, is the potential to increase disclosure about public companies,
putting information just a mouse click away for investors.
Corporations are jumping online to reach shareholders. According to the
National Investor Relations Institute, more than 90% of publicly traded
companies now have a presence on the Internet, posting fact sheets, press
releases, quarterly and annual reports, earnings, and analysts' reports.
SEC Eager to Crack Down On False Information Online
Ironically, the same technology companies use to target shareholders is
being used by investors to challenge management, by disgruntled employees
with an axe to grind, and by those aiming to push the stock's price up or
down. The weapon of choice: An online posting, often made anonymously.
Such chat can be "enormously damaging," Unger noted, citing the case of a
PairGain (PAIR) employee who posted a rumor on the Internet earlier this
year and included a link to a bogus Bloomberg News page that appeared to
confirm that PairGain would be acquired by an Israeli firm.
PairGain's stock surged more than 30% before backing down once the company
announced there wasn't a merger in the works. Gary Hoke, who posted the
item, was identified quickly and has since pleaded guilty to criminal
charges.
Looking ahead, Unger said the SEC's "cyberforce" which routinely patrols
the Internet, is eager to crack down if false information is spread online.
"This, in my mind, is a very fertile area for enforcement," agreed Stephen
Cutler, deputy director of the SEC's enforcement division. "If someone is on
a chat room or bulletin board and saying something false about a company,
whether positive or negative, that's something we would look at very
closely."
SEC cops on the cyberbeat may pursue such cases even if the individual
spreading the false report doesn't personally gain from it. Hoke, for
instance, doesn't appear to have traded PairGain's stock the day he pushed
it sharply higher on the false merger story.
Equally disturbing to regulators are investors with short positions in a
stock who use the Internet to circulate "cybersmears" about the company in
hopes of driving the price down and generating profits for themselves.
"Are there short sellers out there bashing stock? Yes," said Brian Lane,
director of the SEC's corporation finance division. But, like chatting up a
stock, he said the practice existed before the Internet, and may not be easy
to uproot.
Meanwhile, some firms are taking matters into their own hands, assigning an
employee or hiring an outside contractor to patrol the Internet and monitor
online chatter for any references to the company, good or bad.
"Almost every in-house lawyer will say: Don't engage," if the company
uncovers rumors, said the SEC's Lane. That's the position taken by NIRI,
which estimates only 3% of U.S. corporations respond to chat-room rumors.
"Some CEOs can't help themselves," and will jump right in, despite advice
to stay out of the fray, however, Unger noted.
Rumors, General Griping Not Likely To Result In Action
There's good reason to say nothing, attorneys say, because if a company
knocks down one rumor, and doesn't react to the next one, its silence could
be viewed as an admission the report is true.
"You've got to believe there's a lawsuit somewhere in the future," if
company responds to some reports, but not others, Lane said. To avert that,
he said firms would do well to adopt written policies about handling
Internet chat and rumors.
Rumors and general griping about a company aren't likely to generate legal
action by the SEC, though, since its purview is limited to fraud, not libel.
"Gripe sites" have been popping up, often using a web address that attaches
an expletive before or after the company's proper corporate name, making it
easy for unhappy shareholders to find a their way to a forum for airing
their complaints.
"There's not a lot a company can do about that," Unger said, except to
preemptively register domain names that its critics might want to employ.
Charles Schwab & Co. (SCH), the online brokerage firm, has done just that,
reserving web addresses such as screwschwab.com, and schwabsucks.com.
"We have proactively gone out and registered domain names," said Schwab
spokesman Glen Mathison. Of the dozens of names the company has staked out,
most are similar to Schawb's existing address, or reflect names it may want
to use in the future, such as schwabjapan.com. But, Mathison said the
company registered a few off-color domain names to "forestall criticism," on
those sites.
Don't look for SEC officials to undertake the same move, though. "It never
crossed our minds," said Unger. -By Judith Burns; 202-862-6692;
judith.burns@dowjones.com
(END) DOW JONES NEWS 06-27-99
02:42 PM
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