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There are only two problems with Internet stock forums: false rumors and inconvenient truths.
Joseph McCafferty, CFO Magazine
July 1, 1998
A few days before LCC International Inc. released its first-quarter earnings last May, investor relations director Trish Drennan logged on to an Internet stock discussion site to see what investors were saying about the McLean, Virginia-based wireless-telecommunications company. To her surprise, someone had posted a message on the Web site that consensus earnings of 4 cents were too low, and that real quarterly earnings would be much higher. Worse, that someone was an LCC employee, using his real name, freely admitting that he worked for the company.
"I knew it was a big deal and that I had to do something right away," recalls Drennan. She called LCC general counsel Peter Deliso, and the two contacted the employee. They informed him that his actions were illegal and that as an insider, he could be held liable for them. The employee said he was simply sharing his opinion on the company with fellow investors and saw no harm in what he did. He thought Drennan and Deliso were overreacting. Several days later he quit, though Drennan says his resignation was unrelated to the Internet revelations. (As it turned out, the employee was wrong: actual earnings for the quarter were 4 cents a share.)
Not surprisingly, the proliferation of Internet chat rooms and stock forums, such as Silicon Investor, Yahoo! Finance, Motley Fool, and Stock-Talk.com, is keeping managers like Drennan awake at night. Intended to provide individual investors with a means of exchanging information about their investments, Internet forums are ideally suited for short-sellers and stock manipulators to wreak havoc on companies' stock. Smaller companies with illiquid stock or a high concentration of retail investors are particularly vulnerable to rumors and lies.
As a result, companies are beginning to monitor Web sites for abuse. They are also awakening to the need to educate all employees — not just managers — about the legal dangers involved in revealing inside information. But not all of the news is bad: Internet stock forums can provide valuable insight into the perceptions of individual investors. Some companies, in fact, are using these sites to improve their investor relations.
Internet forums enable investors to discuss specific companies by posting messages that any visitor to the sites can read. Other investors respond, creating a series of messages known as a thread. Threads on active stocks may receive hundreds of messages daily. Many users also post Web links to other information, such as articles related to a company or press releases. Threads also form on specific topics, such as the government's antitrust case against Microsoft Corp.
The forums received wide publicity two years ago, when Internet discussion helped propel the market value of a little-known company called Comparator Systems Corp. from a mere $36 million to more than $1 billion. Hundreds of messages hyping the company (heralded as a maker of revolutionary fingerprint identification systems) were posted on stock forums. In three days in May 1996, 449 million shares of Comparator stock traded hands, setting records on the Nasdaq stock market. Eventually Nasdaq halted trading, and a Securities and Exchange Commission investigation revealed that Comparator was basically a hoax — it had no products and virtually no assets.
Stocks of larger, legitimate companies have also gone on wild rides thanks in part to Internet chat groups. The market value of Iomega Corp., a San Mateo, California, computer storage company, skyrocketed 500 percent in three months, to $7 billion in May 1996, aided by an Internet-fanned frenzy. As the stock ran up, short-sellers jumped into the discussions. Eventually Iomega's market value fell to just under $2 billion, where it stands today. (Iomega is still one of the most talked-about stocks on the Internet — for good reason, given disappointing performance and the departure of its CFO.)
More recently, much of the Bre-X Minerals gold scandal played out over Internet stock forums. Investors argued the merits of the Canadian company's claim to have struck gold in Indonesia, while news reporters watched the boards for the latest developments. And Internet stocks themselves have been subject to volatile swings, partially propelled by discussion groups.
Volatile swings are produced not only by short- sellers and imaginative investors. The Internet provides a convenient vehicle for employees who, for whatever reason, want to share their insider's perspective with the world. At LCC, Trish Drennan spends an hour each week on the Internet combing through dozens of messages on her company, looking not only for rumors and misinformation but also for abuse of the forums by employees.
"They don't get it," says Drennan of employees who discuss the company in online forums. "They don't think what they know [about the company] is material information, but often it is."
The employee who speculated on LCC's first- quarter earnings wasn't the first LCC worker to post sensitive information on an Internet stock forum. A few months earlier, CFO Richard Hozik had called a companywide meeting to discuss the departure of CEO Piyush Sodha. Hozik spoke in detail about company matters. To Drennan's horror, shortly after the meeting an employee, using the name Joe Engineer, posted the details of Hozik's discussion on the Yahoo! message board.
"What boggles my mind is that more of this wasn't explained in the official press release" about Sodha's departure, the employee wrote, seemingly oblivious to the sensitive nature of the information. Today, LCC's lawyers have joined Drennan in monitoring the Internet forums.
Employee breaches on the Internet underscore the need for companies to educate their workforces about dealing with sensitive information. "You can't stop them from using the sites and posting information," says Terry Proveaux, director of the Center for Investor Relations Education, in Washington, D.C. "But you can educate them on the meaning of material information." At LCC, Drennan has launched a two-day training session for all employees, not just top managers. The session covers business ethics, reporting of business information, material nonpublic information, and dealing with sensitive information.
Monitoring Internet forums is one thing, participating in them another. In a survey of more than 200 companies by the National Investor Relations Institute, 9 out of 10 respondents said they did not participate in the forums.
One reason for the avoidance is uncertainty regarding the legal issues involved. "There has been a lack of guidance from the Securities and Exchange Commission," says Proveaux. "Companies are flying blind."
IR directors generally fear that responding to chat room threads opens up a Pandora's box of disclosure troubles. "Once you start doing that, you get into issues of selective disclosure," says Christine Mohrmann, investor relations director at Vanstar Corp., a technology services firm based in Atlanta. "And if you respond to rumors, you are expected to do it every time. It becomes an onerous task."
Even Yahoo! Inc., which hosts a stock chat forum, doesn't take part in the discussion of its own stock, even though rumors are started about the Santa Clara, California-based Internet media company practically daily. "Once you begin making comments, you might feel the need to respond to everything," no matter how outlandish, explains Diane Hunt, director of corporate communications at Yahoo!. "You could really go down a rat hole."
Some companies see opportunity in the chat rooms. Stephen Push, vice president of corporate communications for Genzyme Corp., in Cambridge, Massachusetts, logs on to Motley Fool and Silicon Investor from time to time to post news releases and field questions about the Cambridge, Massachusetts-based biotechnology company. "People have a lot of good questions, and I try to answer them the best I can," says Push, whose efforts have scored big with investors who use the threads. "His input is unmatched by any investor relations person whom I have ever dealt with," gushed Robert Floyd in a message posted on Silicon Investor. "He is one of the main reasons I have stayed with the stock."
But if companies refuse to step into the Internet fray, how can they defend themselves against rumors and lies? One company, Presstek Inc., a Hudson, New Hampshire, printing technology company, is taking legal action. Presstek filed suit last year against three persons who allegedly made false and defamatory statements about Presstek on Motley Fool and Silicon Investor. The case was settled out of court this past February. (Settlement details are confidential.)
Most companies, however, are fighting misinformation with information. "Information reduces the risk of rumors," says Jack Queeney of the Financial Relations Board, a Chicago-based investor relations firm. "The more companies make available, the less likely investors are to come to their own conclusions." Vanstar, for instance, provides links from its home page to the SEC's EDGAR database and to Vanstar's stock quotes. The company has increased the information it puts on the Web site and updates it more often. Vanstar also invites individual investors to listen to its quarterly conference calls — a practice that should discourage chat room participants from reporting highlights of the call out of context.
Indeed, the most common form of abuse on Internet stock chats is the posting of partial or even altered press releases, says Queeney. His advice: Make it easy for investors to check press releases on the Web.
Whether Internet stock forums become a common way for companies to communicate with individual investors remains to be seen. One thing is certain: the chat rooms aren't going away. Investors "prefer the agenda of their fellow traders to that of the press or company press releases," says David Zgodzinski, an expert on Internet investment sites who writes articles for the Silicon Investor Web site. "They are increasingly skeptical of those sources."
Zgodzinski predicts that the forums will continue to grow in importance: "In a few years' time, there will not be an IR department anywhere that doesn't at least look at what is being said."
How companies can quash Internet rumors and lies.