Underscoring a problem attorneys say will only become more prevalent, a company today sued three individuals for allegedly using the Internet to manipulate stock prices.
The suit, filed in federal court in New Hampshire, accuses three people in separate states of using the Internet to drive down the stock price of Presstek, a graphic arts company located New Hampshire. The suit alleges that the individuals were short-selling, which means they stood to gain from a drop in the company?s stock.
"By issuing postings, the defendants have been able to broadcast false statements to millions of potential stock purchasers and investors," the suit alleged. "Prior to the advent of the Internet, the pooling of such resources was a difficult, high-risk, if not impossible task."
The suit, which makes claims for defamation and unfair business practices, is not the first such action to be filed against end users on the Internet. But it does appear to be the first time a company has sued individuals alleged to have used the Net to manipulate its stock.
Attorneys and securities enforcers agreed that the use of the Internet to manipulate stock prices is a problem that appears to be getting worse. And in many cases, there is little companies can do.
"It?s a matter of concern for virtually all public companies," said Tower Snow, a securities attorney with Brobeck, Phleger & Harrison in San Francisco. He added that high-tech and emerging growth companies can be especially hard hit by rumors spread on the Net because their stock tends to be more volatile.
"They really don?t have much protection in terms of what?s posted in chat rooms and on bulletin board systems," Snow said.
Helane Morrison, an assistant administrator in the Security and Exchange Commission?s San Francisco office, said the agency already has placed Internet fraud on its radar screen, with agency enforcers regularly surfing the Net looking for fraud and encouraging members of the public to report any fraud they encounter. Nevertheless, Morrison acknowledged that enforcement may be tricky.
"We can?t prevent people from speaking on the Internet in the first place, but we try to warn investors that they shouldn?t give extra credence to comments they read on the Internet, especially from anonymous sources, just because [they are] on a computer."
Last week, the SEC successfully prosecuted the publisher of an Internet newsletter for hyping stock without disclosing he stood to financially gain from the recommendations. The publisher, Theodore R. Melcher Jr. received a year in federal prison in connection with articles he wrote about Virginia computer company Systems of Excellence.
But with so many online forums discussing stocks, the SEC's battle is at best uphill. Motley Fool and Silicon Investors are two of the better-known platforms devoted to discussing what stocks are hot, and what stocks are on their way down, but there are countless other chat rooms and bulletin boards on the Internet and private online services.
What?s more, federal law prohibits systems operators from disclosing online members? identities without a court order. It also may be difficult to sue someone merely for opining that a particular stock may be a good or bad buy, attorneys warn.
"There?s a balancing of interests here between anonymity vs. responsibility," said Jim Brelsford, an attorney at Hosie, Wes, Sacks & Brelsford in Menlo Park, California, who represents online companies that host investment forums. Still, he said, companies are becoming increasingly aggressive about going after online statements they find objectionable.
"I think we?re going to see more of these claims," Brelsford said, "because it's imaginable that [these sites] can and will affect prices in the market."