from San Francisco Chronicle
sfgate.com
Investors Beware
In Internet Chat Rooms
Arthur M. Louis, Chronicle Staff Writer
Monday, June 29, 1998
Maybe you have a big chunk of money to invest and are looking
for sage advice. Or you already own stocks or mutual funds and
want an expert to evaluate your holdings.
Why don't you consult an unemployed actor, or a kid who dishes
out macaroni at a college cafeteria?
Absurd, you say?
Maybe so, but such people -- and others with no greater expertise
--dispense stock-market tips every day on investment-oriented
Web sites, sharing their wisdom with thousands -- perhaps even
millions
--of other investors.
The greatest bull market of all time, coinciding with the
development of the Internet -- the greatest communications
revolution of all time -- has made investment chat rooms and
bulletin boards wildly popular.
This worries the Securities and Exchange Commission, the
National Association of Securities Dealers and other regulatory
spoilsports.
They point out that the investment advice you get on the Internet
may be misleading or false -- often deliberately so. What's more,
you can't depend on the regulators to protect you because they
monitor only a tiny fraction of all Internet chit-chat.
Unscrupulous promoters have used the Internet to falsely hype
stocks they own, and shady short-sellers have used it to bash
stocks in an effort to force prices down.
''Spreading publicity about a company or an individual has never
been easier,'' notes John Reed Stark, special counsel for Internet
projects with the SEC's Division of Enforcement.
Iomega, a disk-drive maker listed on the New York Stock
Exchange, and Comparator Systems, an over-the-counter
company that makes fingerprint-identification systems, are
prominent examples of stocks that went on wild roller- coaster
rides because of Internet postings.
On May 3, 1996, an unidentified individual bombarded
numerous Internet bulletin boards with frenetic messages touting
Newport Beach-based Comparator:
''Everyone who hasn't gotten on this stock, get in now. Share
price jumped from 6 cents to 12 cents today!!!! Don't miss the
boat!!!!
''The stock is currently trading at .25 ... this morning's open
was .06. I think it will continue to rise to about one dollar.''
Sure enough, it reached a dollar on the next trading day -- May 6.
More than a half-billion shares changed hands in less than a week
before suspicious Nasdaq officials halted trading on May 9.
When Comparator opened for trading again more
than a month later, it sank back to 6 cents.
''The Internet gives someone the ability to lend themselves an air
of legitimacy that is difficult to obtain in the outside world,'' says
Elisse Walter, chief operating officer for regulation with the
NASD.
She adds: ''We try to remind people that the old rules still apply:
If something looks too good to be true, it probably is. Don't let
the speed with which information is available these days make
you act without careful deliberation.''
A chat room is like a big cocktail party, where dozens of
investors exchange ideas in real time. You type your own
comments on your computer keyboard and read what others have
to say on the screen.
Bulletin boards are less fleeting and tend to be more substantive.
Investment buffs type out their opinions -- often at great length --
and their messages go straight to the Web site's archives, where
other investors can read them at their leisure and respond with
their own postings.
There are hundreds of investment sites -- nobody knows exactly
how many -- but experts say the bulk of the gabbing evidently
gets done on four of them:
-- Microsoft's www.investor.com.
-- Motley Fool, whose chat rooms and bulletin boards are
accessible by typing in the key words ''Motley Fool'' on
America Online.
-- www.siliconinvestor.com, owned by Go2Net Inc., of Seattle,
which runs several Web sites.
-- www.yahoo.com, sponsored by Santa Clara-based Yahoo
Inc., the Internet media company.
Responding to demands from its customers, E-Trade Group, the
online discount broker based in Palo Alto, recently began rolling
out chat rooms on its Web site (www.etrade.com).
It is the first time any brokerage firm has done this, but it may not
be the last. Says Tom Taggart, a spokesman for rival Charles
Schwab & Co.: ''We don't do it yet, but I wouldn't rule out
anything.''
E-Trade's chats currently are accessible to only about 10 percent
of the firm's 400,000 customers -- mainly those who expressed
interest. They should be available to all of them -- and on a
limited basis to noncustomers -- by the end of August, says
Kathy Levinson, president of E-Trade Securities.
Although chat rooms are popular, their value as an investment
tool seems negligible -- to put it politely. Perhaps 80 percent of
the verbiage consists of social interaction between chat-room
veterans (''Winslow -- nice to see you again'').
Sometimes the conversation degenerates into irrelevant
wrangling, as when an Arab and a Jew recently launched a debate
about Palestine on an AOL investment site and wound up hurling
obscenities at each other in CAPITAL LETTERS.
Even when someone actually chats about investing, the content is
generally superficial. (''Medical Manager Corp. is suddenly
popular.'')
Chat rooms, it seems, serve mainly as group-therapy sessions for
people who are in the market and nervous about it.
The bulletin boards are profound by comparison.
A man hiding behind a screen name but identified in his AOL
profile as a junior high school teacher recently posted a
well-reasoned defense of Amazon.com Inc., the online book
retailer, on a Motley Fool bulletin board.
Responding to other posters who wondered how the stock could
go from $9 to $100 in a year when the company has yet to turn a
profit, he argued that www.amazon.com is becoming a
phenomenally popular Web site -- a ''primary destination'' for
Net surfers. That means it might eventually be able to sell books
''at cost'' and still make a profit by selling ads.
That may turn out to be an entirely valid theory -- but consumer
groups warn that you shouldn't take any single statement as
gospel when researching securities on the Internet.
''The less-sophisticated investors, I think, take seriously any
well-written comment,'' says John Markese, president of the
180,000- member American Association of Individual Investors.
''We tell people not to act on anything unless they confirm it
from a disinterested third-party source, such as Value Line or
Standard & Poor's.''
Peter G. Crane, managing editor of IBC Financial Data in
Ashland, Mass., contends that investors can learn little of value
from chat rooms or bulletin boards.
''You aren't going to have a chief financial officer of a company
giving you inside data. You're far more likely to encounter some
hypester. Investment professionals and company insiders still
have a stranglehold on the really good information.''
But David Forrest, head of online operations for Virginia-based
Motley Fool, insists that his service provides plenty of added
value.
''We've had cases where people were talking about
semiconductor manufacturing in a chat room, and someone will
log on from Korea and tell you what's happening in the chip
industry there,'' Forrest observes. ''You're never going to get
that from a security analyst's report.''
Forrest says Motley Fool bulletin-board readers were among the
first to hear that AT&T Corp. was seeking a marketing and
technology alliance with AOL -- something that was officially
confirmed in mid-June. ''There were several rumors on our
boards long before it happened.''
Motley Fool does its best to keep its chat rooms and bulletin
boards free of fraud, Forrest says.
Motley Fool employees are present in each of the six chat rooms
to monitor the conversations. Anyone who seems to be
unjustifiably hyping a stock will be booted. Those who appear to
be spreading false information about a stock -- a violation of
federal securities laws
--will be reported to the SEC.
The SEC and NASD have their own Internet surveillance
programs, but they are still rudimentary. Evidently no one has yet
been prosecuted or disciplined specifically for statements they
made in chat rooms or on bulletin boards.
The New York Stock Exchange declined to say what, if
anything, it does to combat Internet investment fraud.
The SEC says it relies primarily on tips and complaints from
outsiders to advise it of possible Internet abuses. But it also has
begun assigning staffers to monitor some chat rooms and bulletin
boards.
Stark concedes that the SEC can never fully scope out the
Internet's ''infinite territory.''
The NASD is spending millions of dollars to create a
computerized Internet surveillance program called Netwatch. The
rollout is scheduled for this summer.
Netwatch will try to detect unjustified hyping or bashing of
stocks by brokerage firms and their employees, over whom it has
disciplinary authority.
Once Netwatch is up and running, NASD's computers will
continuously scan the bulletin boards on the most-popular
investment Web sites. Bulletin boards lend themselves to this
kind of surveillance because the postings remain accessible for
long periods of time.
Netwatch will not be able to scan chat rooms, where words come
and go too quickly for effective automated surveillance.
The computer will search the bulletin boards for hyped-up catch
phrases such as ''easy money,'' ''get rich quick,'' ''can't lose''
or ''double in a month,'' regulation chief Walter says.
If a company that doesn't get mentioned often on the bulletin
boards suddenly starts showing up frequently, that could serve as
a ''red flag,'' Walter remarks.
It may simply turn out that the company issued a surprisingly
good or bad earnings report, or announced a merger. But if there
is no obvious cause for the proliferation of messages, NASD will
try to determine whether someone is manipulating the stock.
CHAT ROOM RULES
Average investors -- those who aren't brokers or company
insiders
--can be enthusiastic about stocks they own in chat rooms and on
bulletin boards. Sincere, optimistic comments like, ''I'm glad I
bought Intel at 70 and I bet it goes to 90 soon,'' are protected by
the constitutional right to freedom of speech. But hyping or
bashing a stock unjustifiably, or deliberately spreading false
information, could bring the authorities down on your head.
Investors cannot:
-- Disseminate information about a company that you know to be
fraudulent. Doing so could result in a fine or even imprisonment.
-- Claim to be someone they aren't. Internet chatters sometimes
pretend they are company officers or others with inside
knowledge. That too is a crime.
-- Spam. If you bombard a lot of bulletin boards with a lot of
messages saying essentially the same thing about a stock, you
could be accused of illegal market manipulation.
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