Hear Ye,Hear Ye..........February 21, 1999
Stemming the Tide of Touts on Stock Message Boards
By MICHELLE LEDER
ith no sales to speak of, a long string of losses and a tiny market capitalization of $70.3
million, Imaginon Inc. is not the type of company many investors think twice about.
On the Internet, however, Imaginon is something of a celebrity. Every day, hundreds of people burn
up the sites known as stock message boards, pondering the fate of the company, a software
developer in San Carlos, Calif., that recently released its first products, including a Java-based Web
browser.
In December and January, Imaginon postings on the Yahoo Finance board went from a few dozen a
week to a few dozen a day to a few dozen an hour, with daily trading volume climbing from near
zero to its current average of 1.84 million shares.
As stock message boards grow in popularity -- well over 30,000 messages are posted on the four
largest boards on a typical day -- pressure is mounting on several fronts to rid the boards of people
who use them to illegally tout stocks and spread false information.
The Securities and Exchange Commission has defined such touting as lying about companies, lying
about one's independence from a company or failing to adequately disclose the nature, source and
amount of compensation one receives from a company.
As talk about Imaginon grew on the message boards, fueled by a reverse acquisition the company
completed on Jan. 20, its stock price shot up, from 41 cents a share in October to a high of $15.25
in intraday trading on Jan. 26; the stock closed at $5.75 on Friday.
"It's kind of like the Jerry Springer show -- it's gotten out of hand," said David M. Schwartz, chief
executive of Imaginon, who attributes the volatility to the message-board chatter.
From time to time, Schwartz posts his own messages on Yahoo's board. Using the name
IMON_2nd and identifying himself as the chief executive, he says he tries to dispel the many rumors
about the company.
At the end of January, only days after Schwartz had dismissed a rumor that the company had inked
a deal with America Online, someone using the name G_Gekko_1999 logged on, inquiring whether
anyone had heard that Barron's, the financial weekly, was predicting that the stock would hit $225 a
share. (Barron's wasn't.)
Schwartz said he worried that the rumors and volatility were scaring away long-term investors. "Our
stock has been all over the map, and that doesn't do us any good in the long run," he said.
He is not alone in such concerns. To track down flagrant abusers of the message boards, the SEC is
increasing the number of subpoenas it issues to board operators, allowing it to try to tie a posting to
an e-mail address. Though the commission declined to say how many subpoenas it was issuing,
board operators say that they have become much more frequent and that the SEC is requiring a
quicker response.
Companies fearing possible stock manipulation have raised their own complaints with securities
regulators and board operators. But executives at the four largest boards -- Yahoo Finance, Silicon
Investor, the Motley Fool and the Raging Bull -- worry that in the frenzy to eliminate abuse,
legitimate investors will face restrictions on what they can say on the boards.
"Anyone who looks at the boards knows that there's some manipulation involved," said Ethan
Caldwell, the general counsel for Go2net Inc., the Seattle-based parent of Silicon Investor, whose
boards average 15,000 postings a day. "It's a double-edged sword, because the boards are a
unique medium where the average investor can find out information. The flip side is that the stocks
are subject to manipulation."
But distinguishing between manipulation and the innocuous musings of an enthusiastic investor can be
difficult. Though rules vary from board to board, few messages are ever removed.
In fact, of the four largest board providers, only the Motley Fool even monitors its boards, never
mind screen them for accuracy, which all four regard as impossible. Instead, the board providers rely
heavily on self-policing, with participants complaining to the board operator and the SEC when they
think someone is trying to manipulate a stock.
"We're just not going to censor to deal with a few kooks," said John Scheibel, the director of
government relations for Yahoo, who likens its role to that of a post office, where information is
simply distributed.
On a typical day, the 8,445 message boards of Yahoo Finance -- each devoted to a particular stock
-- receive tens of thousands of messages. William C. Martin, a founder of Raging Bull, added, "We
don't want to be fact-checkers." Since starting in June, the service has seen the number of messages
triple, to 6,000 a day.
Much of the problem lies in the anonymity provided by the message boards. With little effort, people
can create several identities on the boards and keep changing their names, often bouncing from
board to board. If someone is suspected of manipulating a stock on a board, the SEC can issue
subpoenas, but even if it can obtain a user's real e-mail address, investigators must still match the
user's postings to sales activity.
"Once they get a cheap stock, they have to manipulate it, and the best way to manipulate it is to
quickly spread false information," said Richard H. Walker, director of enforcement at the
commission, describing its Internet surveillance as "one of the highest priorities." During a single day
in October, in its first sweep in this area, the commission filed 23 enforcement actions against 44
individuals accused of touting stocks.
A spokesman for the SEC said the commission would also investigate message-board users who
spread negative rumors.
Enforcement actions can include formal charges, fines and bans on future trading. The SEC can sue
in federal court or bring an administrative proceeding; in either case, the accused can mount a
defense.
After the October action, complaints to the SEC about message-board activity rose from about 120
a day to as many as 400, then receded to about 200 to 300. About 120 investigators actively surf
the Internet, looking for abuse on the message boards, Walker said.
The SEC and most companies tend to ignore so-called chat rooms -- which can also be filled with
rumors -- because the real-time talk on such sites is quickly erased. "We consider the worst threat
the posting on the bulletin boards, because it stays up there virtually forever," said Michael D.
Allison, chief executive of International Business Research in Princeton, N.J., a corporate
investigations firm.
Many companies are at a loss as to how to respond. But last October, Medinah Energy Inc., a tiny
mining company based in Lake Elsinore, Calif., took the unusual step of suing people who posted
disparaging messages about the company. The suit contended that they had made "false and
defamatory statements."
The suit listed the online pseudonyms of the authors, since actual names or other identifying
characteristics were unknown, according to Michael Morrison, Medinah's lawyer. As a result, he
said, he is not sure where the suit will go next. But filing it stemmed the flow of message-board
chatter.
Some companies try to press their cases with the SEC John Stark, director of Internet enforcement
for the commission, said the number of calls from corporate investor-relations officials about
message boards has gone from several a month to several a day. Some companies appeal directly to
the message boards, though they are rarely successful.
"We get a ton of requests from corporate officers and even corporate counsel to remove messages,"
said Caldwell of Go2Net. "And we tell them in as nice a way as we can that we have no way of
knowing if the information is true."
Schwartz said his own postings have not kept rumors off the board. A few days after asking whether
the stock would jump, G_Gekko_1999 was back on, asking whether the company was really
teaming up with a major Internet service provider -- another false rumor."I'm going to continue to
post, but I haven't seen any real effect," Schwartz said.
Related Sites
These sites are not part of The New York Times on the Web, and The Times has no control over their content or
availability.
Imaginon Inc.
Yahoo Finance board on Imaginon
Securities and Exchange Commission
Yahoo Finance
Silicon Investor
Motley Fool
Raging Bull
Medinah Energy Inc.
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