BioCurex, Inc.(fka BOCX)

[rmzport]

By Nicholas Rummell
October 12, 2008 12:01 AM ET

Once merely the scourge of microcap companies, the online rumor mill is now wreaking havoc on the stocks of larger companies and creating big problems for investor relations officers.

In recent weeks, Internet gossip seemed to be behind separate, sudden stock drops at Apple, Morgan Stanley and the holding company for United Airlines. “Rumors are like tire spikes for a company,” said Maureen Wolff-Reid, president of consulting firm Sharon Merrill Associates. “They can deflate a stock before the IR department has time to react, and sometimes even before a company realizes a rumor is behind the sudden slide in the price.”

As a result, IR heads, already reeling from the worst economic crisis in years, are scrambling to devise new ways to head off potentially damaging rumors—from contacting key shareholders to regularly monitoring message boards and blogs.

Just last Tuesday, Morgan Stanley suffered a nearly 25% one-day stock price drop after rumors circulated on the Web that its proposed deal with Mitsubishi UFJ had gone sour. According to a Morgan Stanley spokesman, business reporters started calling the company at 1:00 p.m., and the stock began plunging 20 minutes later.

Apple was hit earlier this month, when someone posted an item on CNN's citizen journalism website claiming the computer company's chief, Steve Jobs, was being admitted to an emergency room after a heart attack.

Bogus, of course, but damaging: Apple's stock dropped about 9% in minutes. A spokeswoman for CNN said the Securities and Exchange Commission is now investigating whether “johntw” posted the rumor as part of a market manipulation scheme.

Stranger still: Last month, an old story about UAL Corp. filing bankruptcy in 2002 was reposted on a small Florida newspaper's website and then linked to by Google Finance and Bloomberg. The story sent the company's stock sliding as low as a penny before it recovered, and United is now considering possible litigation against the news outlets. Nasdaq was even forced to suspend trading in the stock for about 90 minutes.

“In the 15 years I've been doing this, I've never seen anything like it,” said Beth Saunders, chairman of FD Ashton Partners.

Ms. Saunders explained that it's much more common for rumors to spread among key sell-side analysts or hedge funds, and that such rumors take up about one-fifth of IR officers' time trying to clarify.

And dealing with rumors can be difficult. Most companies have a policy of ignoring rumors, fearing that addressing them would be akin to negotiating with kidnappers or terrorists; do it once and you set yourself up for shooting down every rumor, however absurd.

Ignoring them, however, may not always be the right strategy.

“They're not life-threatening in most cases, but they can cause lots of casualties,” said Ian Campbell, a managing director at Abernathy MacGregor Group, a communications consulting firm. In serious cases, companies should put out a press release in order to adhere to fair-disclosure regulations and inform all investors about the false rumor. Smaller rumors can be dealt with by calling up key shareholders.

On the other hand, if the story has not caught on among investors, the do-nothing approach is probably best, he said. “If the rumor has no legs, why put out a statement and alert the world to [it].”

According to Ms. Wolff-Reid, every IR team should have one staff member who is responsible for monitoring the most influential message boards, online forums and blogs for a particular industry. She suggests using Google Alerts or other tools to see which websites include the most comments on a particular company or industry.

Floor specialists or market makers at the various exchanges are also a good place to “get the tone and tenor of the Street,” said John Palizza, an IR consultant and former investor relations officer at Sysco. The exchanges may even halt trading in a particular stock if the decline reaches a certain point based on rumors.

Online message boards and blogs such as Seeking Alpha and Yahoo Finance were more influential during the dotcom era, but they still play a part in driving stock prices. Hedge fund managers like Daniel Loeb, of Third Point Management—which is being probed by the SEC for potential market manipulation of financial stocks—have admitted in court to posting under various pseudonyms to drum up information on companies. Several other posters have been indicted or accused in recent years of bashing or boosting stocks for their own (or others') profit.

But as is often true with the Internet, it's hard to discern who is posting purely for entertainment, and who is using message boards to knock down stocks that they've shorted.

According to fiery Overstock.com CEO Patrick Byrne, the message boards are populated by posters who are in cahoots with prominent short hedge funds. Mr. Byrne is well known for his crusade against naked short-selling, in which an investor sells short a stock before actually borrowing the shares.

While he admits it's difficult to police message board posters, Mr. Byrne told Financial Week he would like the Securities and Exchange Commission to mandate pre-borrowing for all short sales, instead of allowing investors three days to obtain and deliver the stock. He also argued that the SEC's recent emergency order to ban all short-selling in financial stocks was draconian, and that “there was this situation this summer where the SEC gave us an apartheid system for 19 Brahmin stocks, and the rest of you can eat dirt.”

Critics of naked short-selling have been called paranoid (and worse) by detractors, and regulators until recently have downplayed the threat of the practice.

Last month, however, the SEC tasked its enforcement division to seek sworn statements from hedge funds, broker-dealers and other investors on their trading positions, including short positions, and allowed staffers to obtain documents using subpoenas.

But proving abusive “outsider trading” is as difficult as prosecuting abusive insider trading. Several former SEC enforcement division directors said the agency has brought very few cases in this area, primarily because it is so difficult to prove a person either knew the rumor was false or that the rumors were connected with a purchase or sale. They couldn't recall any cases the SEC had investigated involving hedge funds using message board stooges to manipulate stocks during their tenures.

The current climate may make it easier. One former SEC associate director said, “If this Steve Jobs poster was found to have traded [based on that misinformation], I have no doubt the SEC would bring a claim, especially in this environment.”

To combat the rumor mill, others have called for greater disclosure from short-sellers. The National Investor Relations Institute last week asked the SEC to require hedge funds and other institutional investment managers to publicly disclose short positions in all public companies more frequently. Currently, such disclosures are made only on a quarterly basis.

In a statement, NIRI president Jeff Morgan said corporations have a right to know who is shorting their stock: “I find it unacceptable that I can receive my personal brokerage statement within 10 days after month-end, but investment managers require 45 days to report their holdings at the end of a quarter to the SEC.” FW


http://www.financialweek.com/apps/pbcs.dll/article?AID=/20081012/REG/310139982/1023/OTHERVIEWS