Yes, Message Boards Are Used to Manipulate Stocks -- By the Pros
By Don Luskin
Special to TheStreet.com
Originally posted at 4:42 PM ET 8/30/00 on RealMoney.com
There are serious market manipulations happening in some online stock discussion boards. But I disagree with Jim Cramer's assertion that they are a cancer on the markets, and I think the solutions to the worst abuses are straightforward.
In the spirit of full disclosure, I must mention that my company, MetaMarkets.com, hosts discussion boards on its Web site, and we consider boards a valuable component of our business model and customer proposition. TheStreet.com hosts boards as well. So we're all in this together, right?
Whatever may be wrong with online stock discussion boards, what's good about them is that they give ordinary nonprofessional investors the platform from which to make their views known to a wide audience. Boards create a level playing field, breaking the oligopoly on stock market punditry once enjoyed by Wall Street analysts and the media.
Some nonprofessionals post research and opinions on discussion boards that are as insightful and thoughtful as any I've ever seen -- I never cease to be amazed at what ordinary people know. The majority of posts are mediocre and harmless, just like reports by Wall Street analysts and most financial journalists. And a minority -- sometimes a noisy minority -- post messages that are thoughtless, abusive or manipulative. No question about it: There are people who "talk their books" on discussion boards in the hope of influencing stock prices.
But the worst abuses on discussion boards -- the serious manipulations that have real economic consequences -- are committed by professionals. It's the professionals who talk the biggest books, and who stand to make the biggest bucks from manipulations. And because they post anonymously, they think they can get away with it.
The veil of anonymity is what makes these manipulations possible. It is anonymity that prevents the readers of discussion boards from understanding the self-interested motives of abusive professional posters. And it's anonymity that emboldens the professional abusers by making them feel invulnerable to prosecution under the existing securities laws that make their manipulations blatantly criminal.
So job one in cleaning up online discussion boards must be to rip away the veil of anonymity from the professional. And the regulatory authorities -- the Securities and Exchange Commission and the National Association of Securities Dealers -- are the ones in the perfect position to do the ripping. It could be done with the stroke of a pen.
All the SEC and the NASD would have to do is promulgate a rule that defines anonymous expression of opinions on stocks by the brokers, fund managers and investment advisers whom they regulate as manipulative on the face of it. It wouldn't matter whether a message was true, false or anywhere in between. The mere fact of its anonymity would cause it to be deemed manipulative. Any message poster would be obliged to post his or her name, affiliation and position in the security being discussed, just as reputable Wall Street securities analysts typically do now when publishing a printed report.
According to a bulletin posted on the NASD's Web site, posting on discussion boards by registered brokers "without identifying themselves as a such, is not specifically a violation of NASD rules." It's time to create a new rule, and make it apply universally to brokers, fund managers and investment advisers.
Requiring professionals to identify themselves on discussion boards would create a simple, objective, cut-and-dried basis for enforcement action -- so it would significantly raise the stakes on the professional manipulators. Without the veil of anonymity, most of the manipulation would stop overnight.
While no one is exempt from the antifraud provisions of the securities laws, in 1985 the U.S. Supreme Court in Lowe vs. SEC affirmed the free speech rights of ordinary people and the media to talk about stocks without regulation. But the laws are clear that the speech of professionals who meet the registration requirements of the SEC or the NASD are subject to regulation. So removing the veil of anonymity from professionals presents no Constitutional issue, and lives squarely within the current framework of regulatory jurisdictions.
The worst solution to the problem of manipulation on discussion boards is to shift the responsibility for enforcement from the regulators to the board sponsors. The host of an online discussion board is no more in a position to monitor and assure the quality of every posted message than a "common carrier" such as AT&T is to monitor every utterance made over its telephone network.
There is a long legal tradition of the exemption of common carriers from such unbearable burdens. Section 509(c)(1) of the Communications Decency Act, passed by Congress in 1996, states: "No provider or user of an interactive computer service shall be treated as the publisher or speaker of any information provided by another information content provider." Parts of the act were overturned by the Supreme Court, but this section still stands. At least two federal court decisions have enforced this statute in favor of America Online. This is analogous to the court rulings that have absolved newspapers and magazines from undue burdens in quality-assuring letters to the editor.
The responsibility of message-board operators should begin and end with an obligation to cooperate with regulators when they seek to enforce the securities laws
Let's be clear here: No amount of regulation will thwart someone hellbent on breaking the law. And securities fraud has been around for as long as there have been securities, and it has nothing particularly to do with the Internet. The case uppermost in all our minds now -- the Emulex (EMLX:Nasdaq - news) hoax -- had nothing to do with message boards. Quite the contrary, it relied on the unwitting cooperation of traditional media to work. The best brands in financial news were helpless to answer the question: Is it real, or is it Emulex?
Discussion boards are valuable forums for sharing information and debating stocks and markets. The simple adaptation of regulations I have proposed would stop most of the worst abuses. But let's not do anything draconian that might have the effect of inhibiting the freewheeling, empowering nature of online discussion boards. Let's not destroy the village in order to save it.
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Don Luskin is President and CEO of MetaMarkets.com, and a portfolio manager of OpenFund. At time of publication, OpenFund had no positions in any of the securities mentioned in this column, although holdings can change at any time. Luskin appreciates your feedback and invites you to send it to Don Luskin .
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