BIRMINGHAM, Ala. -- Richard Scrushy, the chief executive officer of HealthSouth Corp., was making the rounds of investor conferences last fall when analysts pulled him aside to ask if he had seen the latest Internet banter. A bulletin board devoted to his company had turned into a broadside.
One posting called the company, which provides rehabilitation services, a house of cards starting to tumble. Others predicted that he would be probed for billing fraud. A series of messages alleged that executives were swapping their spouses, with one poster going so far as to boast of his supposed affair with Mr. Scrushy's wife.
Hardly a cybersophisticate, Mr. Scrushy had never even heard of the electronic board owned by Yahoo! Inc., where the messages were piling up. "Here I am, the CEO of a multibillion-dollar company, and I'm having to answer about what some weirdo has said on a message board," Mr. Scrushy fumes.
So he jumped into the fray. Using cybersleuths and shoe-leather detectives, Mr. Scrushy has begun unmasking the message writers on his board, and he is suing some to put a stop to their postings. One enthusiast turned out to be the husband of a disgruntled employee. Another was an ex-employee.
Many of the anonymous posters aren't even aware that HealthSouth knows who they are and may sue those whose messages it deems defamatory. The latest target for its detectives is someone with the online name "gletel," who recently posted that HealthSouth had been downgraded. It hadn't been.
Until the Internet came along, the traffic in opinion about stocks and bonds was largely -- and for the most part calmly -- controlled by Wall Street analysts. The message boards, however, let all comers vent their feelings, and that's the root of a growing problem for corporate executives: To ignore the postings is to risk seeing them grow even more outrageous and spread.
Some companies have gone straight to the message boards to try reasoning with posters. More are trying to thwart those of their online critics who promulgate falsehoods, which is complicated by posters' use of secrecy software to protect their anonymity. When the brokerage firm E*Trade Group Inc. discovered that a problematic poster on its Yahoo board was using secrecy software, it hired a computer whiz to slice through the shields. "My non-anonymizer was better than his anonymizer," crows Henry Carter, E*Trade's vice president for compliance.
Liars and Schemers
Mr. Scrushy calls some of his online detractors liars and schemers. But the cybercritics and their defenders see an overreaction to what in some instances is fair and accurate commentary, and they fear that message boards will be stripped of the free expression that has made them so popular.
A few have begun fighting what they view as corporate intimidation. They include Kimberly Landry, a former HealthSouth employee who posted many of the more salacious messages on the Yahoo board. Sued by HealthSouth for defamation, Ms. Landry is demanding access to corporate records to prove that her postings were correct. Her attorney, Jill Craft, asserts: "Truth is an absolute defense, and the truth will come out."
The HealthSouth board began on an upbeat note when Yahoo launched it in late 1997. "This has an awesome recommendation by the pros. Check it out," reads the first posting, concerning HealthSouth stock, by Loony987.
Yahoo now has several thousand of these boards, each dedicated to a single company. Yahoo prohibits vulgarity, defamation and other offensive behavior like posting junk mail, but it doesn't screen or edit messages before they are posted, and the discourse varies tremendously.
Serious investors find merit in the boards. Paul Kloepper, a physician's assistant from Hastings, Neb., scans the HealthSouth board as an "early warning system" for public reports that he might not otherwise hear about. Analyst Howard Capek of Warburg Dillon Read in New York, says, "At the end of the day, I'm not going to put a buy, sell or hold recommendation based on a bulletin-board posting. But looking at and monitoring the boards is something a prudent analyst has to do."
Initially, the HealthSouth chatter dwelled on the company's niche in providing clinical rehabilitative care, and the finer points of its earnings ratios. But a seismic shift occurred last summer when the company's stock price began to ebb. "Get out and stay out," wrote dcm555 on July 22. "I can't believe anyone would invest long-term in this pyramid scheme calling itself a company."
Jr111 replied: "You may not be far wrong. I have heard rumors of a federal lawsuit for several weeks now." No such suit materialized.
Mr. Scrushy presented an easy target. Self-made and brash, he founded HealthSouth 15 years ago with $50,000, and he doesn't hide his pride in reaching sales last year of $4 billion. His 1997 compensation made headlines: $106.8 million including bonus and stock gains.
Now 46 years old, Mr. Scrushy uses a helicopter and five private planes to reach the company's more than 1,900 facilities in all 50 states, while the new 73-acre headquarters complex in Birmingham displays his name in tall script. The grounds are patrolled by a security force; the CEO says he has had several death threats in recent years.
Were They Duped?
Posters poked fun at Mr. Scrushy's executive style and business practices, but the message board went wild last September when HealthSouth disclosed that it would face pricing pressures from its managed-care customers, and its share price plunged to below $8 from the $30 peak it had reached that summer. In composite trading on the New York Stock Exchange, HealthSouth closed Tuesday at $15.125 a share, up 37.5 cents. "WE WERE ALL DUPED!!!" Bonesman3 wrote.
Worse was to come. Scurrilous messages from one poster proclaimed that Mr. Scrushy's wife, Leslie, who was seven months pregnant at the time, was having an affair with him. Investors were calling to ask about various messages. And the head of a company that Mr. Scrushy was trying to buy raised the sexcapade talk as a concern. "He brought it up at dinner," Mr. Scrushy says. The deal never gelled.
Mr. Scrushy had staffers monitor the board for the worst postings, and when their printouts turned into a stream he phoned Bruce Fischman, a Miami attorney who handles various matters for the company. Mr. Fischman recalls: "He was angry. He was frustrated. And the cause for his frustration was that he didn't know how to stop the bleeding."
Until then, companies aggrieved by an Internet posting mostly had sued the message-board provider. But only those providers who tried to control what moved through their system have been held liable by the courts -- much as a publisher, but not a distributor, is subject to libel law.
With Yahoo taking a hands-off stance, Mr. Fischman instead sued the message writers, starting with a "John Doe" filing in Florida's Dade County on Oct. 16 that let him subpoena Yahoo records.
Yahoo warns its users that it might be legally compelled to release information on them. HealthSouth asked for records on each of its board's more than 300 anonymous posters, and Yahoo turned over only about 20. Yahoo officials say HealthSouth's request was "overly broad."
'Scrushy Should Resign'
On Oct. 27, just four days after Mr. Fischman got his first Yahoo records, Peter Krum, 33, was in his office by the loading dock at the Pennsylvania State University Conference Center Hotel, sending a message to the Yahoo board: "Scrushy should resign." Hours later, the campus security chief came through the door wanting to know if Mr. Krum was Dirk Diggler, the author of that message and dozens of others, including the "house of cards" characterization of the company. He was.
Mr. Fischman had tracked Mr. Krum down by computer, and a detective he hired then filled in the blanks. Mr. Krum had previously worked for HealthSouth as a hospital food-service manager. He didn't own any company stock. He was married, and his wife was pregnant with their first child. He had boasted on the board of an affair with Mrs. Scrushy, but what alarmed Mr. Scrushy was his claim to have been inside the Scrushy home.
Mr. Scrushy and his wife sued Mr. Krum and pressed criminal charges of harassment and stalking, which were dropped when Mr. Krum signed an apology stating he had made everything up. He lost his $35,000-a-year manager's job at Penn State. Mr. Krum, who declined to comment for this article, said in court records: "It was a really stupid game. I did not intend to harm anyone, but this was a game."
HealthSouth asked Yahoo to remove all of Mr. Krum's postings, but some were left on the board. Asked how they made this decision, Yahoo officials referred only to their "terms and conditions," which prohibit any posting that is "unlawful, harmful ... or otherwise objectionable."
Mr. Scrushy points out that the board has turned almost cordial since he went on the hunt.
Legal observers say it's difficult to foresee what factors might play out in a message-board defamation case that goes to trial. Are the boards even seen as believable? Can anyone be harmed by the chatter? "There are good arguments on both sides," says Lyrissa Barnett Lidsky, an associate professor at the University of Florida College of Law.
Mr. Scrushy says he knows where to draw the line. "If somebody's got an opinion that I'm making too much money ... or somebody doesn't think that we should have hired this person, or bought this company, that's fine. . . . But when they come on and have a direct assault about an individual, or are making a statement that the company's earnings are going to be X amount, and they're not, I have a problem with that. That's the kind of stuff that should be dealt with."
As for HealthSouth's defamation suit against Ms. Landry, the company is citing such postings as "Screwshe and his cronies are all megalomaniacs. Instead of having sex they get off on their power and positions." She called Mr. Scrushy a "bozo" and a "crook" and predicted the company stock would decline because it paid too much for its surgery centers.
HealthSouth says the postings were false, though believable enough to cause damage. Ms. Landry is now asking HealthSouth for a long list of financial and personal records that she says will prove she was right. Among them: Mr. Scrushy's income statements and expense reports back to 1995 and flight records for the company's aircraft.
"This is a First Amendment issue," says Ms. Landry's attorney, Ms. Craft. Mr. Fischman has filed objections to the requests and says the company will prevail.
Copyright © 1999 Dow Jones & Company, Inc. All Rights Reserved.
Re:ZSUN's Suit Against Bashers:
Firm sues 8 Net users over derisive messages
By Bruce V. Bigelow
UNION-TRIBUNE STAFF WRITER
July 6, 1999
SAN DIEGO -- A little-known company with a U.S. office in Solana Beach has sued eight Internet users, alleging that they posted fraudulent and defamatory messages about the company in a conspiracy to manipulate its stock price.
The messages, posted by individuals using aliases such as "trader14U," "Auric Goldfinger" and "realmoney," repeatedly mock the company, called ZiaSun Technologies Inc., as "Stinky Stock."
An increasing number of companies have been complaining to the U.S. Securities and Exchange Commission about purportedly false messages posted to Internet chat rooms and message boards.
One of the most notorious cases of Internet securities fraud was closed last month, when an employee of Tustin-based PairGain Technologies Inc. pleaded guilty to charges stemming from a phony news report posted on the Internet in a bid to drive up the company's stock.
The Internet's cloak of anonymity and participants' tendency to insult or "flame" each other fosters a Wild West atmosphere in such electronic forums, posing new implications for freedom of speech.
But relatively few civil lawsuits have been filed so far.
"As far as I can tell, there have probably been five or six lawsuits of this kind filed around the country," said Christopher Howard, a Seattle-based lawyer representing ZiaSun. A similar defamation case was filed in May against a group of unnamed Internet users by M.H. Meyerson & Co., a New Jersey brokerage.
ZiaSun, which trades over the counter, represents itself as a holding company that operates a number of Internet-based businesses, such as Online Investors Advantage and Asia4Sale, that target Asian markets.
Bud Leedom, who publishes the San Diego Stock Report, says he has never heard of ZiaSun and generally does not include over-the-counter stocks in his report because it is too difficult to separate the wheat from the chaff.
Some of the companies that trade on the so-called "bulletin board" do not report complete financial results, "so I just exclude them," Leedom said.
ZiaSun's lawsuit, filed June 24 in a Seattle federal court, alleges that many messages posted on the Silicon Investor Web site amounted to a "cyber-smear" campaign against the company and its executives.
"I don't want to say anything. I've never been sued before," said Mike Morelock of Greenwood, Ark., who was named as a defendant in ZiaSun's lawsuit.
Morelock, a trader who posted Internet messages under the alias C.M. Burns, said he did not want to comment on the record about the case. But he nevertheless discussed it, saying ZiaSun's lawsuit has absolutely no merit and that the Internet discussion "is one of the funniest things you'll ever read."
More than 3,000 messages have been posted about ZiaSun on Silicon Investor's electronic message board since November 1998, when a ZiaSun forum was established for stocks priced at $5 or less.
Silicon Investor, which is operated by Washington-based Go2Net, was not named as a defendant.
The discussion reflects an intensely sarcastic verbal battle between ZiaSun's detractors and supporters, with both sides occasionally threatening to report the other's activities to SEC investigators.
The messages also question the credibility of ZiaSun's executives, including its Hong Kong-based chief executive, Anthony L. Tobin. Telephone calls concerning ZiaSun's lawsuit were routed to the Veritas Group, an investor relations consulting firm based in Vancouver, B.C.
"We feel strongly that there's a potential conspiracy among these individuals" to drive down ZiaSun's share price for the benefit of short sellers, said Mark Harris, who identified himself as ZiaSun's vice president of investor relations.
"We fully intend on launching a stock-buyback program," Harris said. "Why? We want to make their lives as miserable as possible. We intend to fight them with our credibility."
Harris said Tobin was outraged by the false statements posted on the Web site. ZiaSun's chief executive is a former British journalist and public relations executive who was attached to Singapore's Ministry of Information and the Prime Minister's Office.
"It's one thing to say you don't like the company, but they say that the company is full of crooks and criminals and that it's a fraud," Harris said. "They're making complete false misrepresentations. They're doing anything they can to discredit us."
ZiaSun's lawsuit also named Floyd D. Schneider of Saddle River, N.J.; Stephen N. Worthington of San Francisco; Paul Harary of Boca Raton, Fla.; and Tom Livia of Boca Raton, Fla. They could not be reached for comment.
Three other defendants, known as "jjs64," "GUS SIDERIS" and "Alpine Sleuth," have not been identified, ZiaSun's Howard said.
Sandra Harris, an SEC enforcement officer in Los Angeles, said she was unfamiliar with the ZiaSun case, and John Reed Stark, who heads the SEC's Internet enforcement unit, could not be reached for comment.
But in an April 5 speech, the commission's chief enforcement officer said the Internet has "revolutionized the old-fashioned boiler room" and created a bull market in securities fraud.
"Whereas policing insider trading was perhaps our greatest enforcement challenge a decade ago, policing the vast universe of the Internet is unquestionably our greatest challenge today," Richard Walker said.
Walker noted, however, that Internet-related securities fraud comes in several flavors.
One variety is the so-called "cyber-smear" campaigns, often perpetrated by "short sellers" to drive down a stock price on the basis of false information. A short seller is a trader who borrows shares of a stock to sell in the hopes that the borrowed shares can later be replaced at a lower price.
Another variety, Walker said, is the "pump and dump" campaign orchestrated by those who hype a stock by circulating false and misleading information to drive up a stock's price so they can sell their shares at an inflated value.
--------------------
<!DOCTYPE HTML PUBLIC "-//W3C//DTD HTML 4.0 Transitional//EN">
<HEAD>
<META content=text/html;charset=iso-8859-1 http-equiv=Content-Type>
<META content="MSHTML 5.00.2614.3401" name=GENERATOR>
<STYLE></STYLE>
</HEAD>
<DIV> </DIV>
<DIV> </DIV>
<DIV>
<TABLE border=0 width="100%">
<TBODY>
<TR>
<TD align=left width="25%">
Re:ZSUN's Suit Against Bashers:
Firm sues 8 Net users over derisive messages
By Bruce V. Bigelow
UNION-TRIBUNE STAFF WRITER
July 6, 1999
SAN DIEGO -- A little-known company with a U.S. office in Solana Beach has sued eight Internet users, alleging that they posted fraudulent and defamatory messages about the company in a conspiracy to manipulate its stock price.
The messages, posted by individuals using aliases such as "trader14U," "Auric Goldfinger" and "realmoney," repeatedly mock the company, called ZiaSun Technologies Inc., as "Stinky Stock."
An increasing number of companies have been complaining to the U.S. Securities and Exchange Commission about purportedly false messages
posted to Internet chat rooms and message boards.
One of the most notorious cases of Internet securities fraud was closed last month, when an employee of Tustin-based PairGain Technologies Inc. pleaded guilty to charges stemming from a phony news report posted on the Internet in a bid to drive up the company's stock.
The Internet's cloak of anonymity and participants' tendency to insult or "flame" each other fosters a Wild West atmosphere in such electronic forums, posing new implications for freedom of speech.
But relatively few civil lawsuits have been filed so far.
"As far as I can tell, there have probably been five or six lawsuits of this kind filed around the country," said Christopher Howard, a Seattle-based lawyer representing ZiaSun. A similar defamation case was filed in May against a group of unnamed Internet users by M.H. Meyerson & Co., a New Jersey brokerage.
ZiaSun, which trades over the counter, represents itself as a holding company that operates a number of Internet-based businesses, such as Online Investors Advantage and Asia4Sale, that target Asian markets.
Bud Leedom, who publishes the San Diego Stock Report, says he has never heard of ZiaSun and generally does not include over-the-counter stocks in his report because it is too difficult to separate the wheat from the chaff.
Some of the companies that trade on the so-called "bulletin board" do not report complete financial results, "so I just exclude them," Leedom said.
ZiaSun's lawsuit, filed June 24 in a Seattle federal court, alleges that many messages posted on the Silicon Investor Web site amounted to a "cyber-smear" campaign against the company and its executives.
"I don't want to say anything. I've never been sued before," said Mike Morelock of Greenwood, Ark., who was named as a defendant in ZiaSun's lawsuit.
Morelock, a trader who posted Internet messages under the alias C.M. Burns, said he did not want to comment on the record about the case. But he nevertheless discussed it, saying ZiaSun's lawsuit has absolutely no merit and that the Internet discussion "is one of the funniest things you'll ever read."
More than 3,000 messages have been posted about ZiaSun on Silicon Investor's electronic message board since November 1998, when a ZiaSun forum was established for stocks priced at $5 or less.
Silicon Investor, which is operated by Washington-based Go2Net, was not named as a defendant.
The discussion reflects an intensely sarcastic verbal battle between ZiaSun's detractors and supporters, with both sides occasionally threatening to report the other's activities to SEC investigators.
The messages also question the credibility of ZiaSun's executives, including its Hong Kong-based chief executive, Anthony L. Tobin. Telephone calls concerning ZiaSun's lawsuit were routed to the Veritas Group, an investor relations consulting firm based in Vancouver, B.C.
"We feel strongly that there's a potential conspiracy among these individuals" to drive down ZiaSun's share price for the benefit of short sellers, said Mark Harris, who identified himself as ZiaSun's vice president of investor relations.
"We fully intend on launching a stock-buyback program," Harris said. "Why? We want to make their lives as miserable as possible. We intend to fight them with our credibility."
Harris said Tobin was outraged by the false statements posted on the Web site. ZiaSun's chief executive is a former British journalist and public relations executive who was attached to Singapore's Ministry of Information and the Prime Minister's Office.
"It's one thing to say you don't like the company, but they say that the company is full of crooks and criminals and that it's a fraud," Harris said. "They're making complete false misrepresentations. They're doing anything they can to discredit us."
ZiaSun's lawsuit also named Floyd D. Schneider of Saddle River, N.J.; Stephen N. Worthington of San Francisco; Paul Harary of Boca Raton, Fla.; and Tom Livia of Boca Raton, Fla. They could not be reached for comment.
Three other defendants, known as "jjs64," "GUS SIDERIS" and "Alpine Sleuth," have not been identified, ZiaSun's Howard said.
Sandra Harris, an SEC enforcement officer in Los Angeles, said she was unfamiliar with the ZiaSun case, and John Reed Stark, who heads the SEC's Internet enforcement unit, could not be reached for comment.
But in an April 5 speech, the commission's chief enforcement officer said the Internet has "revolutionized the old-fashioned boiler room" and created a bull market in securities fraud.
"Whereas policing insider trading was perhaps our greatest enforcement challenge a decade ago, policing the vast universe of the Internet is unquestionably our greatest challenge today," Richard Walker said.
Walker noted, however, that Internet-related securities fraud comes in several flavors.
One variety is the so-called "cyber-smear" campaigns, often perpetrated by "short sellers" to drive down a stock price on the basis of false information. A short seller is a trader who borrows shares of a stock to sell in the hopes that the borrowed shares can later be replaced at a lower price.
Another variety, Walker said, is the "pump and dump" campaign orchestrated by those who hype a stock by circulating false and misleading information to drive up a stock's price so they can sell their shares at an inflated value. </TD></TR></TBODY></TABLE></DIV>
|
