The California Department of Corporations this week settled a lawsuit against an investor for violation of the California investment laws concerning "false and misleading" information posted on the Internet--one of the first such cases to be resolved, but likely not the last.
"You don't see cases like these very often anymore," said Bruce Vanyo, a securities litigator at the law firm Wilson Sonsini Goodrich & Rosati who was not involved in the case. "They're a relic of 70 years ago. You typically don't catch anyone doing it. But this settlement shows that the Internet can be used and abused in affecting stock prices."
The lawsuit is the latest effort by the department to police stock fraud on the Internet. Since last year, it has set up an Internet Compliance and Enforcement Team, which has been cracking down on online scams.
Victor Idrovo of Manhattan Beach, Calif., allegedly posted "false or misleading" messages on Yahoo's Finance message board and "intended to affect the offer, purchase, and sale" of the stock of Metro-Goldwyn-Mayer by using the name of Frank Mancuso, the former chairman and CEO of MGM.
In settling the suit, which was filed last week in Los Angeles County Superior Court, state securities regulators obtained an injunction, a retraction, a fine and costs.
"This case sends a message that people should be more prudent about what they post online regardless of their anonymity," said Marc Crandall, the department's lead counsel of Internet compliance and enforcement.
On April 19 and Oct. 19, Idrovo allegedly claimed to be the former MGM head and wrote messages indicating stock price predications. He also relayed a message from Kirk Kerkorian, the majority shareholder for MGM.
With a headline reading, "Kirk say a minimum of $24 a share," the first message read: "This bad boy is heading north. See you at 22 by the end of the month, if not sooner."
The actual stock was much lower at that time, and the message was an attempt to "talk the stock up," according to Crandall.
But the message that caused uproar, Crandall said, came Oct. 19--when the stock was on its way down.
With a headline reading, "Let the selling begin," the message read: "Down over 2 today and the rites (sic) have not even been issued. If you wait much longer you will lose any amount you might have made with the rites (sic)."
Crandall said the message implied that the former MGM head was suggesting that investors sell all the stock because it was falling.
Although Idrovo's lawyer declined to comment on the lawsuit, Idrovo had stipulated to the injunction and penalties without admitting or denying the allegations.
Idrovo was a frequent trader with a pattern of both long- and short-selling MGM stock through several online brokerage accounts.
"A case against someone who spoofs an identity without authenticity and says something in the name of someone else, I think that's no great reach to find him guilty of something," said Charles Merrill, an Internet lawyer for McCarter & English in Newark, N.J.
Although lawyers are seeing a crackdown on Internet fraud by government regulators, legal cases such as these are sending wake-up calls to Internet users and providers as well as potential online con artists.
"People are really starting to get the picture that these actions are going to be taken seriously and made a high priority," said William D. Briendel, an attorney specializing in securities litigation for Greenberg Traurig. "I think when you have extensive, high-profile prosecutions by the regulators that seems to act as a deterrent."
Briendel said government regulators are not only developing new technology to identify fraudulent schemes on the Internet, but they are also enlisting providers as allies to help track down con artists through the use of subpoenas.
In December, the first Internet stock-fraud case was filed by the Securities and Exchange Commission against three men who were charged with manipulating a stock through Internet chat rooms.