Bad Chat and Cybersmears

Your company's name is being dragged through Internet mud. How can you protect your company, reassure investors, and prevent it from happening again?

Companies that cannot present such a clear cause-and-effect relationship must consider more creative methods to discourage damaging postings. These companies might consider organizing bimonthly meetings for different levels of employees. At the beginning of every meeting, management could present its plan of action, after which the managers would withdraw. Employees would be encouraged to discuss and write down complaints, as well as positive information and recommendations for management, which would assess these issues and form a plan to rectify the situation, clarify procedures, or implement suggestions.

Although employees may be a major source of bad chat and cybersmears, material may also originate from company investors. The SEC, which began its surveillance of Internet fraud and stock manipulation in 1995, has found that cybersmears against microcap companies are among the most prevalent types of fraud on the Internet. This type of defamation is most often perpetrated by investors with the intent of driving down the price of a company’s stock and taking advantage of a short position.

In July 1998, the SEC formed the Office of Internet Enforcement, which seeks to discover and prosecute perpetrators of Internet securities fraud and stock manipulation, and to educate investors about the existence of these schemes and, in general, the prevalence of widespread dissemination of false and misleading information on the Internet. To date, however, the SEC has not provided companies with any preventative measures, remedial measures, or notification procedures. Rather than simply waiting for the good word from Washington, your company will be better served by putting the appropriate policies in place.

Dori Hanswirth is a partner with the litigation and media departments of Squadron Ellenoff, which has offices in New York and Los Angeles. Courtney L. Birnbaum is an associate with the corporate department of the firm.

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