Just when it seemed stock manipulation suits were
out of fashion, the Internet put the problem
in the spotlight for securities regulators.
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
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
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
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.