Stock Chat

There are only two problems with Internet stock forums: false rumors and inconvenient truths.

A few days before LCC International Inc. released its first-quarter earnings last May, investor relations director Trish Drennan logged on to an Internet stock discussion site to see what investors were saying about the McLean, Virginia-based wireless-telecommunications company. To her surprise, someone had posted a message on the Web site that consensus earnings of 4 cents were too low, and that real quarterly earnings would be much higher. Worse, that someone was an LCC employee, using his real name, freely admitting that he worked for the company.

“I knew it was a big deal and that I had to do something right away,” recalls Drennan. She called LCC general counsel Peter Deliso, and the two contacted the employee. They informed him that his actions were illegal and that as an insider, he could be held liable for them. The employee said he was simply sharing his opinion on the company with fellow investors and saw no harm in what he did. He thought Drennan and Deliso were overreacting. Several days later he quit, though Drennan says his resignation was unrelated to the Internet revelations. (As it turned out, the employee was wrong: actual earnings for the quarter were 4 cents a share.)

Not surprisingly, the proliferation of Internet chat rooms and stock forums, such as Silicon Investor, Yahoo! Finance, Motley Fool, and Stock-Talk.com, is keeping managers like Drennan awake at night. Intended to provide individual investors with a means of exchanging information about their investments, Internet forums are ideally suited for short-sellers and stock manipulators to wreak havoc on companies’ stock. Smaller companies with illiquid stock or a high concentration of retail investors are particularly vulnerable to rumors and lies.

As a result, companies are beginning to monitor Web sites for abuse. They are also awakening to the need to educate all employees — not just managers — about the legal dangers involved in revealing inside information. But not all of the news is bad: Internet stock forums can provide valuable insight into the perceptions of individual investors. Some companies, in fact, are using these sites to improve their investor relations.

Wild Rides

Internet forums enable investors to discuss specific companies by posting messages that any visitor to the sites can read. Other investors respond, creating a series of messages known as a thread. Threads on active stocks may receive hundreds of messages daily. Many users also post Web links to other information, such as articles related to a company or press releases. Threads also form on specific topics, such as the government’s antitrust case against Microsoft Corp.

The forums received wide publicity two years ago, when Internet discussion helped propel the market value of a little-known company called Comparator Systems Corp. from a mere $36 million to more than $1 billion. Hundreds of messages hyping the company (heralded as a maker of revolutionary fingerprint identification systems) were posted on stock forums. In three days in May 1996, 449 million shares of Comparator stock traded hands, setting records on the Nasdaq stock market. Eventually Nasdaq halted trading, and a Securities and Exchange Commission investigation revealed that Comparator was basically a hoax — it had no products and virtually no assets.

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