This is a lengthy article, but thought some might be interested in reading it, SI, Raging Bull and other stock chat forums are mentioned:
Toronto Stock Exchange -
They're watching...maybe
Tuesday Dec 1 1998
From a Stockwatch Internet forum
by Lee M. Webb
Given that information is the most notable feature of the Internet, it is perhaps not surprising that the quantity and quality of information available to investors on the Internet has been a recurring theme on these pages. This week will not be an exception as regulatory monitoring of Internet stock forums will be examined.
When the opportunity for relatively unregulated dissemination of information is conjoined with the opportunity to influence the exchange of relatively large sums of money, the potential for fraudulent abuse is frequently realized. To their chagrin, many investors who frequent Internet stock discussion sites have gained first-hand experience with this phenomenon. The resulting loss of innocence is often accompanied by a substantial financial loss. The Internet is not entirely without oversight by regulatory agencies but in addition to the sometimes nebulous jurisdictional distinctions, occasionally ambiguous statutes, and murky mandates, the representatives of these agencies face many of the same problems as individual investors. They are faced with a relatively new, fluid, evolving, immense medium that allows access to overwhelming amounts of information. The fact that Internet stock scams exist is not so much a matter of some things 'slipping through the cracks' as it is of many things being undetectable in the gaping abysses of the Internet.
The Toronto Stock Exchange is Canada's largest exchange, accounting for just under 89 per cent of trading activity. There were 1,444 TSE-listed companies as of October 31 and 1,735 issues being traded. Yahoo! offers the largest stock discussion site on the Internet and while the figures for the number of messages posted there are not readily available, the second largest site, Silicon Investor (SI), boasts over 6,500,000 messages. Of course, only a portion of the Yahoo! and SI messages, perhaps even a small portion, concern TSE-listed companies. Nonetheless, those are only two of a rapidly expanding number of stock discussion sites: Motley Fool; Raging Bull; StockHouse; sites associated with online brokerages such as E-Trade and netTrader; sites associated with companies such as Kitco; a host of smaller sites, including some that cater to a very limited group of stocks; and the list goes on.
With 550 employees, the TSE is well staffed, but even if every one of those employees was charged with Internet stock forum oversight, it would still be an impossible task to monitor all the discussions on all of the sites. The truth, of course, is that not all of the TSE's 550 employees are charged with monitoring the Internet. In fact, the department that has, among its many duties, responsibility for stock discussion site monitoring consists of 7 people, including Manager of Market Surveillance Neil Winchester's secretary. According to Mr. Winchester, the most important duty of his department is receiving, assessing, and reacting to material news releases and discussing the content with the issuing company. The department is also responsible for decisions regarding halts and resumption of trading and orchestrating these with other North American exchanges when necessary. Second on the list of responsibilities is the day-to-day monitoring of the markets and watching for unusual trading activity, whether it be volume or price. If it can not be accounted for, the company will often be called to see if they can offer an explanation. Depending on the response, a news release may be issued. The third most important duty is "investigative" in the sense that Market Surveillance will make recommendations to TSE investigators when warranted. Surveillance of Internet stock forums is really a small part of the department's mandate, there isn't anyone specifically assigned to it, and it is primarily a reactive process. That is to say, a stock forum may be monitored if unusual trading activity raises a flag. Mr. Winchester acknowledges that Internet surveillance is conducted "on an ad hoc basis" that sometimes results in "asking a company if there is any substance to the rumours." He couldn't recall ever having halted a company specifically with respect to Internet rumours.
The TSE has postings from at least one discussion site automatically fed into its database and other sites are reviewed if a stock moves in an unusual manner. "There's only so much that can be done without hiring an awful lot of people," says Mr. Winchester. He candidly admits that "it's a bit like closing the barn door after the cows have run off." One of the major problems, according to Mr. Winchester, is anonymity. Citing the Internet imbroglio of Philip Services, he observes, "If a company makes any comments regarding chat sites and anonymity, it's like disturbing a sleeping giant." Many Internet posters don't react favourably to attempts to have their identity revealed. "Anyone has the right to express an opinion and if someone calling himself 'Snowflake' says that he talked to the company yesterday and this is what they said, there isn't much that can be done." On the other hand, "If there is a specific claim such as 'there's going to be an announcement this afternoon' Surveillance can call the company to ask about it." Commenting on some of the wilder rumours that circulate on Internet forums, Mr. Winchester suggests that "in many instances people will see through the hype...a novice investor might get caught." It is likely that more than just novice investors get caught up in Internet rumours but, given the terms of reference of the TSE's Market Surveillance department and its limited resources, much of what transpires on stock discussion sites probably goes unseen.
The mandate of the Ontario Securities Commission is more extensive than that of the TSE with respect to safe-guarding the 'public interest'. According to the OSC's Manager of Investigations, Brian Butler, "the whole industry is concerned about Internet technology and the potential for scams." The OSC conducts "ongoing surveillance" and "is trying to establish a process to deal with Internet discussion sites." Mr. Butler did not want to go into the specific details of the present surveillance program. Like Mr. Winchester, he sees the anonymity of the Internet as a major problem. "Some of the information may look very professional but no one knows the source," he says. According to Mr. Butler, there are instances of a single person using multiple identities posting to a chat site and giving the appearance of considerable public interest in a stock. "It's similar to one person buying and selling a stock to make it look like market activity." That scenario probably resonates well with the experience of investors who spend a fair amount of time following stock forum discussions where allegations of multiple posting identities are frequently made.
Another deep-rooted problem, according to Mr. Butler, is investor expectation; people often have unreasonable expectations about what a particular stock will do. Moreover, people often don't fully understand the risk entailed by investing in some stocks. "Speculative means that there's a good chance you'll lose your entire principal," says Mr. Butler. "People don't really understand that." Key phrases such as "guaranteed returns" or "50 to 60 per cent returns" are what Mr. Butler's staff often looks for when they are examining Internet sites. "They should be a flag to anyone," he says. The OSC also watches for people "advising" on investment matters who do not have the proper registration. He points out that "in many cases, they may not even be aware of the legislation regarding financial advising." Beyond that, they may not even know what they are talking about, in spite of the professional appearance of their communications.
Mr. Butler acknowledges that the problems posed by the Internet are enormous and are not susceptible to any quick or easy solution. "The best way to deal with it is through investor education," he says. "The whole industry has to work at it." The OSC is actively involved in a number of education programs and at conferences and seminars that Mr. Butler has participated in "the Internet invariably comes up as a topic of discussion." He takes some comfort in the fact that investors seem to be increasingly aware that information obtained on the Internet should not be taken at face value. As for his own opinion of the Internet and stock discussion sites, Mr. Butler is quite frank: "It may be a wonderful thing but, personally, I wouldn't use the Internet as a source of investment information."
The British Columbia Securities Commission is much smaller than its Ontario counter-part but it has the benefit of someone who is very well-versed in Internet issues; Martin Eady, Deputy Director of Enforcement. The BCSC has recently instituted an Internet Surveillance pilot project that involves monitoring websites, chat rooms, and bulletin boards by one person on a part-time basis. "Notwithstanding what we may think about certain information on the Internet, the Securities Act only goes as far as the BC boundaries unless the information is specifically targeting BC residents," Mr. Eady says. "When reviewing Internet communications, there are three factors to be considered: first, is it a reporting issue; second, is it meant to 'advise'; and third, is it targeted to BC." Commenting on regulatory difficulties posed by the Internet, Mr. Eady states: "We really don't need new laws. This is simply a different form of communication. We just have to think of some untraditional means of dealing with the issues."
"The Internet is just a 'facet' of potential market abuse," Mr. Eady says, citing the Turner Phillips fraud in which an Internet website presence was just one component of a larger scam that included boiler-room operations and official-looking 'hard' correspondence. Integrating these components, the scam operators managed to bilk millions of dollars out of investors around the world. "Stock manipulations of the future will have an Internet component of one sort or another," Mr. Eady predicts. He says that four things are necessary to combat Internet stock frauds: aggressive prosecution; self-policing; surveillance; and investor education. "The market is always ahead of the regulators," Mr. Eady observes. "With the Internet, it's far ahead."
Given the limited financial and human resources available to the various regulatory agencies and the overwhelming amount of information available on the Internet, it would be a mistake to place too much reliance in the belief that Internet stock discussion sites are under the watchful eye of people charged with "protecting the public interest." As dedicated and diligent as the people involved in Internet surveillance may be, the logistics clearly point to the fact that the vast majority of discussion forum messages are never seen by them. Moreover, these agencies are primarily reactive; by the time they get involved much of the damage has already been done. Present surveillance programs may occasionally disclose a fraud; aggressive prosecutions of Internet stock scams may be a deterrent that will provide some protection for investors in the future; and investor education will always be of some benefit. However, the key to ensuring that Internet chat sites are of any honest use must be what Martin Eady refers to as "self-policing". Investors who participate in stock forums must be prepared to ask hard questions, challenge claims, expose unfounded rumours and, where warranted, bring matters to the attention of regulatory agencies. Failing that, they may as well put their mice away when it comes to chat sites.
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