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What Are Message Boards and Chat Rooms?

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What Are Message Boards and Chat Rooms? HADl July 1999 Corporate Advisor www.CanWeChat.com On-line Message Boards Raise Numerous Questions As with much of the rest of our world, the by anyone who accesses the board. There are Internet is having a profound effect on the a number of specialized message boards that securities markets. Many institutional investors focus on investment-related topics, including are now using corporate Web sites as a primary Silicon Investor, The Motley Fool, and Yahoo! source for information about companies. Retail Finance. Some of these boards are open to the investors, empowered by on-line brokerage general public, while others are only available services, are becoming a more significant to subscribers. These message boards are stockholder base. In response to these trends, typically organized by company so that users companies are increasingly using the Internet can easily access all the messages posted about to communicate with investors. any company in which they have an interest. At the same time, institutional investors have “Chat rooms” are real-time versions of Companies are joined retail investors, short sellers and others message boards. In chat rooms, participants increasingly using in the “wild west” of on-line investing — can communicate with others who are logged Internet message boards and chat rooms. onto the service. the Internet to The growth of these forums raises a number Participants in message boards and chat communicate of questions for companies: rooms frequently conceal their identities, with investors • Should we respond to false rumors making it impossible for readers to assess posted on Internet message boards? the biases and motives underlying their messages. This apparent anonymity also • Should we monitor chat rooms to see tends to encourage the posting of messages what is being posted about our company? that are derogatory in content and tone. • Can we prohibit employees from posting messages on the Internet? What Issues are • Is it possible to identify people who Raised by Message Boards anonymously post false or confidential and Chat Rooms? information about our company? From a securities law perspective, What are Message these forums raise several concerns: Boards and Chat Rooms? Inaccurate or Misleading Disclosures Anything said in these forums by someone Broadly defined, “message boards” (also known identified as being from the company could as “bulletin boards”), are information centers be viewed as a disclosure of information by accessible via the Internet. Users of the boards the company. Therefore, any inaccurate or can post messages, which can then be read misleading statements (whether authorized Corporate Advisor 1 or unauthorized) could form a basis for liability in the first few hours of trading. By the time for the company under the general anti-fraud the announcement was debunked several provisions of the federal securities laws. hours later, trading moderated, but the stock still closed up 10 per cent for the day.1 Selective Disclosure Since not every investor has access to these Nine days later, the FBI arrested and charged forums, a disclosure made exclusively in one a 25-year-old computer engineer employed of these forums could constitute “selective by PairGain with securities fraud for creating disclosure,” which has implications for insider the forged Bloomberg News Web site. His motive trading/tipper liability. For this reason, among was unclear, however, as the charges did not others, it is generally not advisable for allege that he engaged in any profit-taking on companies to participate in these forums. the false information. Comparator Systems. Another notable instance Security of Internet hype occurred in May 1996, when the Anyone sending a message from a company’s stock price of Comparator SystemsCorporation e-mail address could appear to be speaking went from 6 cents a share to $1.88 a share in While a company’s for the company, regardless of whether they three days. During that time, more than 449 are in fact authorized to do so. Therefore, instinct may be to million shares of this tiny company changed access to these forums from within the hands before trading was halted. In the days respond to false company should be restricted by company proceeding this flurry of trading activity, policy. Precautions should also be taken to rumors, turning the Internet chat rooms and user forums were filled make sure that outsiders cannot improperly other cheek is with rumors about the stock. One report from access the company’s computers and send the NASD stated that brokers and corporate usually the best unauthorized messages. insiders may have been the source of some course of action Rumors and Market Manipulation of these rumors, presumably in an attempt Another common issue arises when someone, to drive up the share price while the insiders from either inside or outside the company, sold their stock. posts inaccurate messages in an attempt to manipulate the stock price (either up or, Should We Respond in the case of short sellers, down). John Reed to False Rumors? Stark, head of the SEC’s Internet Enforcement Office, calls the act of posting false Internet Generally, it is not advisable to respond to rumors a “corporate cybersmear.” In recent rumors about the company, whether these years, there have been a number of prominent rumors appear on television, in the newspapers examples of this phenomena. or on the Internet. While a company’s instinct may be to respond, especially when the rumor PairGain. Recently, PairGain, Inc., a California is derogatory in nature (as many message company, was the target of an Internet hoax. board posts are), turning the other cheek On April 7, 1999, someone posted a forged is usually the best course of action. Web site that looked like part of the Bloomberg News site. The forged site purported to There Is No General Duty announce that PairGain would be acquired to Respond to Rumors by ECI Telecom Ltd., a competitor. Within There is no general legal duty to respond minutes, PairGain’s Yahoo message board to rumors in the marketplace unless those referred to the bogus announcement and provided a link to the forged Web site. 1The day of the bogus announcement, both PairGain and ECI Telecom issued statements denying any such This triggered a flurry of trading activity, deal. Bloomberg News also put out a news story late the causing PairGain’s stock to rise 30 percent same morning saying that it had run no such article on its newswire. 2 Hale and Dorr LLP rumors can be attributed to the company. spokesperson would not be able torespond Similarly, a company is not required to police truthfully if a potential development or statements by third parties for accuracy. transaction that was not yet ripe for public However, if a company chooses to respond (for disclosure was pending. Such a policy also public relations or other reasons), whatever it helps the company avoid an obligation to says will constitute a disclosure by the company update prior public statements (such as a for which it may be held liable if the response statement refuting a rumor that the company is inaccurate or incomplete. is for sale) when, as a result of intervening events, the prior response is no longer accurate. As a practical matter, the obligation to speak accurately and completely may make it very Unfortunately, many companies overlook the difficult for a company to frame a response even obvious – “no comment” policies apply to all if it wishes to do so because many false rumors inquiries and rumors, including those occurring contain at least a sliver of truth. over the Internet. Moreover, the company's response might SRO Rules May be dissected and distorted –– resulting in Require You to Speak ”No comment“ an escalation of attacks on the company. Despite the dangers of commenting on rumors, policies apply You May Create a Duty in certain circumstances the company may be to Update or Correct required to address rumors publicly if the rumors to all rumors, result in heavy market activity. The New York By responding to a rumor, a company might including those Stock Exchange, the Nasdaq Stock Market create for itself a “duty to update” or a “duty and other self regulatory organizations (SROs), occuring over to correct” the information contained in its impose an independent duty on listed com response. These duties, which would not exist the Internet panies to respond to rumors in certain but for the fact that the company issued a circumstances. The New York Stock Exchange response, flow from statements that are “alive” Company Manual, for example, requires that (that is, still capable of influencing the investing a company should be prepared to make an public) and on which a reasonable investor announcement of important corporate activity might rely. A “duty to update” may exist when if unusual market activity occurs prior to its a statement that was true when made is later announcement. If the rumors are correct, overtaken by events and is no longer true. the company may be required to make “an A “duty to correct” may exist when a statement immediate, candid statement to the public believed to be true when made is later as to the state of negotiations or the state of discovered to have been untrue when made. development of corporate plans.” If the rum Use Your “No Comment” Policy ors are false, “they should be promptly denied Most public companies have a “no comment” or clarified.” policy that prohibits the company from In practice, the operation of the self regulatory responding to inquiries or commenting upon organization rules is less than certain. In many rumors concerning prospective developments cases, no disclosure will be required if the or transactions involving the company (such as company has a valid business reason for not rumors relating to an acquisition of or by the company).2 A “no comment” policy enables the company to “respond” to rumors in a manner 2Adherence to this policy requires that the company respond to such inquiries or rumors with a statement to the effect that that minimizes the awkwardness of a refusal it is the company’s policy not to comment upon or respond to to respond, and avoids premature disclosure such inquiry or rumor.
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