Skip to main content

The NASD Installs A Million Dollar Anti-Internet Defense

Believe everything I say. Believe everything I say.

This is not Big Brother.

This is not Big Brother.

Rather, this is "The National Association of Securities Dealers Search Engine," a surveillance device that the Washington, D.C.-based NASD will employ later this year at a cost of well over $1 million. According to the NASDR, the NASD's regulatory arm, the device will trawl through the Internet 24 hours a day, looking for offending phrases in the chat rooms, web sites and online bulletin boards where people talk about any of the more than 4,000 Nasdaq-listed stocks. It is being developed by

SRA

, a Va.-based software company.

"It's going to let us know when people are saying irresponsible things," says Michael Robinson, spokesman for the NASDR. "We're going to set it up to continually scan the chat rooms on the Internet and search for terms like 'hot little tech stock' or 'guaranteed to go up' -- basically, it'll help us see where stocks are being hyped."

Robinson says the NASDR hopes that the device will turn up potential stock hypesters or short sellers trying to slam a stock. "I don't really know what we'll do with the information once we get it," he says. "That's something we have to look into. But we expect that if we find people hyping stocks we'll probably turn the information over to the

Securities and Exchange Commission

for prosecution."

Just what kind of "perp" might these regulatory vigilantes be looking for? Just last Friday, September 12, the posterboy for Internet securities scams was sentenced on one count of conspiracy to commit stock fraud in a federal court in Alexandria, Va. Theodore Melcher, Jr., publisher of "SGA Goldstar Whisper Stocks" Web site was sentenced to a year in prison and a $20,000 fine after pleading guilty to hyping

TheStreet Recommends

Systems of Excellence

, a bulletin board stock with the unlikely and unforgettable symbol "SEXI."

As reported in today's

Wall Street Journal

, SEXI's former Chairman, Charles Huttoe, reportedly gave Melcher 250,000 shares in the company in January 1996. In short order, Melcher told his subscribers that SEXI was "a once in a lifetime opportunity" and a rumored takeover candidate. Melcher also floodeed

Silicon Investor

with bullish postings about the company -- but as the stock rose and netted Melcher a $315,802 profit, the SEC launched an investigation that resulted in convictions of Huttoe, Melcher and Merle Finkel, and accountant charged with supplying phony audit reports for SEXI and two other companies.

Few would protest the NASDR's attempts to go after such online scoundrels. But civil libertarians are more than a little uneasy about the prospects of having a quasi-private agency trawling thought the Internet looking for wrong-doers. "Issues of confidentiality should probably be carried over all media. If the NASD wants to set themselves up as an Internet policing organization, I think that would make a lot of people uncomfortable," says Beth Haroulem, staff affiliate with the New York Civil Liberties Union who had not been familiar with the plan. "I'm sure the Congress would like to have hearings and there would have to be some sort of regulation to look at that. How broad a sweep of the Internet are they planning to do?"

Haroulem says that even the knowledge that an "official" organization looking to prosecute netizens would have a disturbing effect across the world of cyber investors. "It could certainly chill people's expressions in the speech they use to discuss stocks or anything else in those chat rooms and bulletin boards," she says. "If they intend to scan for offending phrases and just turn the names over wholesale to a government agency -- we would have major problems with that. Any restriction of speech has to be very carefully tailored to have the least impact on free speech, and it doesn't sound like the NASD has taken that into mind."

But the discussion of stocks on the Internet is such a new phenomenon that there is really no common understanding of what is and isn't legally acceptable for the common Joe on the 'net. In the last five years, the rise of the Internet investor has closely paralleled the rise of the individual investor's influence on the overall market. But conversations that might have been held in a barbershop or subway platform ten years ago -- and could have been dubbed illegal -- are now memorialized on the Internet, and in the eyes of some, may be prosecuted as a federal crime. The average individual who has always cherished his right to freely curse or praise his investments, may now find himself on the NASD most-wanted list thanks to a million dollar computer in the nation's capital.

"I'm sure they have the best intentions," says Haroulem. "But in Reno vs. the ACLU in June 26, 1997, the Supreme Court said that you can't try to regulate speech on the Internet in any form. If you try to police peoples speech to capture wrong doers you end up catching all sorts of other people in that broad sweep. The nature of the medium was such that any attempt to regulate it would result in shutting down the channels of expression. The medium is unbridled."

...for now.