More on Cleaning Up Discussion Boards

Earlier this week, I answered Jim Cramer's challenge to clean up the abuse of online stock discussion boards by scam artists who tout and bash stocks. I proposed that the SEC and the NASD change their rules in order to rip the veil of online anonymity from the professionals they regulate, requiring them to identify themselves whenever they post messages and disclose any positions they have in the stocks they write about. If you're a pro, failure to identify and disclose would be securities fraud, a federal beef, regardless of the content of the posted message.

Cramer struck a chord when he raised the issue of discussion board abuse, and my proposal must have struck a chord as well -- in the last 24 hours I've been awash in a tsunami of emails. Many raised fascinating dimensions of the problem that had never occurred to me. With the permission of the authors, here are highlights of the most interesting feedback.

Many of the messages asserted that my proposal would be to difficult to enforce. For example, in an email from Italy, David and Roberta Baroni wrote:

We're just wondering what could keep these liars from giving false names and addresses and email (e.g. somebody else's data) when registering to the boards. Give it a try, and you'll likely be able to register with a fantasy name and address, and an email address like '[e-mail],' which you obtained with another fantasy name ... As we're Italians, we're always amazed by how much you guys assume people will be honest to a certain degree, also when you're talking about dishonest people!

True enough. But no laws can be perfectly enforced. My proposal is intended to make the existing laws against securities fraud easier to enforce. Under existing laws, the SEC or the NASD, or private plaintiffs, have to prove that the content of an abusive post is fraudulent or manipulative. My proposal would lower the standard of proof dramatically: If you're a pro, it would be fraudulent simply to post anonymously! Sure, some abusers would keep on abusing, hiding behind phony email addresses and other devices. But there would be a lot fewer because those tricks aren't foolproof, and under my proposal those tricks themselves become the crime.

A reader who asked to be identified only as "a position trader for a major firm" wanted me to qualify my assertion that the worst board abuses are made by professionals.

Clearly you don't mean the professional trader at a house such as Goldman Sachs or Morgan Stanley or Salomon Smith Barney. Surely you must think of the seedy little daytrader at a shop like (you know all the 'father of day trading' names). We spend our capital facilitating the big institutional investors, not wasting our time posting bogus messages to further our positions.

I didn't single out any particular firms or class of professionals in my commentary, and my proposal wouldn't have any effect on a pro who wasn't posting messages. My point is simply that professionals of all types have both the most to gain (in money) and the most to lose (in reputation) from abuse of discussion boards. They are also the ones who are already heavily regulated. So it makes sense to focus attempts to clean up the boards on professionals of all types.

Reader Israel David argued that occasional abuse doesn't mean that discussion boards aren't valuable for investors.

Frankly, the boards are possibly the single best thing on the Net. I know of specific cases where the boards gave shareholders a voice they never had, which turned out to affect the directions of the company at issue. For example, a thrift in New York (Cohoes Bancorp (COHB Quote) -- I never owned its stock, but I watched its boards) entered into a merger of equals agreement with Hudson River Bancorp (HRBT Quote) HRBT. A week or two ago the shareholders narrowly voted down the merger. If you go back and look at the Yahoo! boards of the last two months, you'd see a lot of shareholders who were upset that their merger consideration was below book value. There is no question in my mind that without the boards, this company would have merged with HRBT. It is now the subject of another thrift's offer at a much higher level."

Jeff Regan opposed my call for a regulatory solution, looking instead to a combination of smart technology and smart board users.

I agree with you that it would be insanity -- a step further down the road to a police state -- to somehow make board ops into publishers responsible for every posting. But what Cramer (and Herb) on RealMoney.com keep missing -- because they presumably are only familiar with unmoderated boards like Yahoo!, Silicon Investor, Raging Bull and TSC itself -- is the power of user moderation. Boards moderated by the crowd itself -- through the use of real-time voting schemes and user-controlled filters.

Regan is right. On the discussion boards on my site, MetaMarkets.com, users can rate each posted message, and each author gets a personal rating based on the cumulative ratings of his messages. Users can focus only on highly rated posts and authors and, if they wish, add the name of any author to an "ignore list," completely excluding that author's posts from further viewing. These self-policing tools have been quite successful at keeping our boards free of vermin.

W. Grant Ellis thinks the whole thing's a tempest in search of a teapot. In an email to Jim Cramer that he copied to me, he wrote:

Put me in the "Libertarian defeatist hogwash" camp. While protection of the "investing public" is entirely honorable, I don't think the "investing public" (emphasis on investing) is bothered much by message boards. The folks bothered, as I see it, have either been personally attacked via the boards or have their own manipulation game hanging in the balance. Here's some advice that I think would be more beneficial than any kind of additional regulation: Ignore the boards (pass the word).

The most unexpected point of view was expressed by an individual who asked that I reveal only his first name, Sherman. While acknowledging that abuse by manipulators is a problem, Sherman is focused on the way companies use lawsuits to suppress legitimate debate on discussion boards -- and claims to be a victim of this.

I contend that the companies abuse the legal system by filing SLAPP (Strategic Lawsuits Against Public Participation) suits against those whose messages offend. Yahoo! turned over my information under subpoena. I have been deposed. In my case, I am a dissatisfied customer who was actually long the company's stock. (I chose to be long so that if I were unmasked, there would be no question of SEC violations.)

At the end of the day, exercising my First Amendment rights has cost me plenty of money. Note that the loser of the suit has no obligation to pay the winner's legal expenses. Several others on the same message board also had their identifying information subpoenaed. Mission accomplished: No one is speaking out against the company any longer. The discussions are very one-sided and positive in nature.

The ease with which plaintiffs gain access to your information is surprising ... and not widely understood. The cost of filing a suit is negligible. Once done, throwing around a few subpoenas costs next to nothing; they are faxed to Yahoo! (proper legal service is not required). Fifteen days later, you are toast. The number of these suits multiplies daily. The recent focus on the topic by RealMoney.com would lead one to believe that it is a new issue. There are countless suits out there that haven't received any publicity (like mine). Some companies issue press releases. ... Here's a good list (over a month old).

Jeffrey Upton, a partner with the law firm Hanify & King (who advises MetaMarkets.com on these matters), sympathizes with Sherman.

Message board posters may be unaware of the risk that they take when they post a message about a company, and that the qualified anonymity they enjoy may lull them into a false sense of security ... Many computer users probably don't see the difference between expressing their opinions in a bar and expressing them in a chat room or on a bulletin board. In the eyes of the law, there really is no difference. But as a practical matter, because the statements are in a more permanent written form and are published to a much larger audience, the potential for litigation and damages is much, much greater.

Sherman's case makes you wonder who's the fox and who's the hound in this hunt. Investing is a high-stakes blood sport -- so both sides can be expected to play rough, especially when the game is played out in public on the Internet.