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Companies Being Beaten Up in Cyberspace?

With message-board bashing a growing concern, the issue of regulation comes up for debate.

For a growing number of companies, it's a jungle out there on Internet message boards. Just ask

Biomatrix

(BXM)

.

The Ridgefield, N.J.-based medical concern says that two former employees and another basher ganged up on the company so viciously with untrue posts, for almost a year, that its stock fell 40%. If you believed the bashers, you'd think Biomatrix made lethal products, violated federal drug laws and doctored its books. "BXM to be downgraded soon!" boomed a typical posting last year. "Massive inventory problems!" "Poor sales!" "No insurance coverage!" "Doctors find useless products!"

Regulators say the Biomatrix case illustrates the growth of organized trashing of companies in cyberspace, often by short-sellers. The goal: drive down the price to make a profit. Short-sellers borrow shares, sell them and then hope to buy them back when the price falls.

"There is this type of concerted activity to go out and disparage a particular stock, and we're seeing it more and more," says Thomas Ryan, securities enforcement chief for Massachusetts.

Of course, bashing isn't the only kind of manipulative activity. Message boards are used to tout stocks, as well. In one widely publicized case, two recent

UCLA

graduates pleaded guilty to federal charges arising from a "pump-and-dump" stock scheme run on the boards. The two, who made $350,000 in less than a week on one stock they boosted, are to be sentenced this month.

The Two Sides

What to do about the problem? Some observers think that the Internet is such a powerful tool and so prone to manipulation that nothing short of a securities enforcement overhaul will reassure investors. Those on the opposite side say legal and regulatory remedies are already adequate to cope with manipulators and that most of what's posted on message boards should be ignored anyway.

"I don't shed any real tears for folks who've lost money because they invested in a stock based on a message board," says Thomas Sweeney, a former

Securities and Exchange Commission

attorney who now practices law in Pittsburgh.

No matter to some companies, though. They're fighting back against bashers. Biomatrix sued its tormentors, and a New Jersey state judge agreed in July that the company had been defamed. (

TSC

touched on Biomatrix's fight in a June

story.) Biomatrix is seeking damages.

The targets of the suit were Raymond and Richard Costanzo, twin brothers from Durham, N.C., and Ephraim Morris of Chandler, Ariz. Raymond Costanzo and Morris formerly worked for Biomatrix. The Costanzos declined to comment, and Morris couldn't be reached to comment.

In San Diego,

Titan

(TTN)

, a developer of information technology and communications systems, has taken on bashers in a court battle of more sweeping proportions. Other cases have targeted mostly daytraders and disgruntled former workers, but Titan contends through its attorney, Marshall Grossman of Los Angeles, that a recent message-board attack on its stock was mounted at least in part by professional short-sellers and hedge-fund principals.

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"The information that we are being provided leads us to believe that there is a heavy involvement of licensed and registered individuals," says Grossman, who declined to provide details.

Real Questions

To be sure, investors and Wall Street analysts do have legitimate questions about some of the companies that come under attack on message boards. Biomatrix, for instance, is being sued by shareholders for alleged mismanagement. The company is fighting the suit.

Regulators so far haven't found any conclusive evidence of professional manipulation of stocks on message boards, but they say they have their eyes open for wrongdoers. The SEC recently announced plans to bolster monitoring of the Internet for fraud and is working to develop sophisticated surveillance systems.

In the Biomatrix case, Massachusetts regulators have stepped in. State securities officials last month filed an administrative proceeding against the bashers, accusing them of stock manipulation and seeking fines. Ryan, the state's securities enforcement chief, declined to discuss profits that may have been made, saying the case is still under investigation.

Actions like that cheer observers who dismiss the need for dramatic steps to cope with bashing. Some even go as far as to say that the brouhaha is overboiled and that most of the problem could be solved by getting offensive posts removed from message boards.

Yahoo!

(YHOO)

, for one, says it has heeded company requests to remove offending posts. A spokeswoman adds that the portal also will turn over names of post authors in response to a subpoena, provided that the message writer doesn't object. (

TSC

has

written about past cases.)

Enhanced Visibility

"I always tell clients not to sue over it because you'll give enhanced visibility to it," says Boris Feldman, a Silicon Valley attorney who advises technology companies. "As little as one out of 50 messages may have a nugget of thought."

As for Wall Street engaging in message-board manipulation? "Paranoid delusion," Feldman says.

Boston attorney Charles Solomont, who represented Biomatrix in the defamation suit, is among those who believes that needed checks against bashers are mostly in place.

"Has there been adequate enforcement up to now?" he asks. "I think not, but it's a function of people who enforce the laws learning how to react. The laws are out there to address these situations."

Others reluctant to intervene include free-speech and privacy experts worried about excessive snooping by regulators. Some in

Congress

fear that the SEC monitoring system will trample basic rights and want assurances that the agency will act prudently.

"We are really looking at some uncharted waters here," says Paul McMasters, First Amendment ombudsman at the

Freedom Forum

, a journalism foundation. That, of course, could be said for the whole message board brouhaha.

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