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E-mail spam is redolent with offers of products, services, opportunities and “get rich quick” schemes. Often, it may be difficult to discern the legitimate from the corrupt. The problem may be most acute when unsolicited advice as to stock or other investments is delivered through spam or posted on message boards. Whatever the vehicle, so-called “pump and dump” schemes that preceded the Internet have grown enormously in conjunction with new technology. Indeed, it has been estimated that more than 100 million junk e-mail messages pushing stocks are sent over the Internet every week. The government is paying attention. In early January, for example, the U.S. Attorney’s Office in Detroit charged that 11 individuals had violated federal anti-spam laws by sending unsolicited e-mail to boost the stock price of a number of Chinese corporations and then selling their shares for a large profit. Last spring, the Securities and Exchange Commission suspended trading in the securities of 35 companies that had been the subject of repeated spam e-mail campaigns. The SEC said that the trading suspensions, which it referred to as “Operation Spamalot,” were intended to protect investors from potentially fraudulent spam e-mail hyping small company stocks with phrases like “Ready to Explode,” “Ride the Bull” and “Fast Money.” The SEC gave examples of the extraordinary impact that spam touting stock can have, including one case where a stock closed on a Friday at $.06 with a trading volume of 3,500, increased after a weekend spam campaign to $.19 by Monday and $.45 per share with a trading volume over a half million within two days, only to collapse back to its pre-spam price and volume less than 10 days later. No doubt, the spammers were able to sell their own shares in the window of inflated prices. (In October 2007, the SEC reported that as a result of its anti-spam initiative, stock-touting spam had been reduced 30 percent worldwide.) Nor has the SEC been reticent to bring enforcement actions in the courts, as illustrated by a decision by Judge Laura Taylor Swain of the Southern District of New York in Securities and Exchange Comm. v. Mandaci. In that case, the SEC alleged that the defendant had purchased certain stocks and then endeavored to artificially inflate the market prices of those stocks by posting false information and making groundless price predictions on Internet message boards before selling out his positions in those stocks �� before they reached the predicted target levels � to make a profit. One of the stocks allegedly involved was PayForView.com. The SEC contended that on Feb. 15, 2000, the defendant purchased 20,000 shares of PAYV stock at $0.6 per share for $12,020 through his E*Trade account. It also alleged the defendant then bought an additional 2,800 shares of PAYV stock at $0.77 per share for $2,176 on Feb. 16, 2000, and, thereafter, an additional 9,760 shares of PAYV stock at $0.83 per share for $8,121. Subsequent to making his initial purchase of PAYV stock, the defendant, using multiple screen names, allegedly posted at least two messages on the Yahoo! Finance message board, touting PAYV as a “Strong Buy” and predicting that the market price would make a “Quick Jump to $1-$1.5 Range.” The defendant also apparently posted information about PAYV on his own “Weekly Penny Picks” Web site (without informing readers that he was solely responsible for the content of the Weekly Penny Picks site). The SEC alleged that on Feb. 16, 2000, the defendant sold 2,500 shares of the PAYV stock for $0.82 per share and that, on Feb. 23, 2000, he sold 19,760 more shares at $0.90 per share, resulting in a total profit of $5,285. According to the SEC, during the time the defendant was touting PAYV, trading volume in the stock increased from less than 1.5 million shares on Feb. 14, 2000, to approximately 4 million shares on Feb. 24, 2000, and the price of PAYV’s stock rose from $0.53 to a high of $1.50 per share on Feb. 24, 2000. The SEC contended that the defendant had violated Section 17(a) of the Securities Act of 1933, Section 10(b) of the Securities Exchange Act of 1934 and Rule 10b-5 promulgated thereunder. The SEC sought a permanent injunction restraining the defendant from future violations of the securities laws, disgorgement of profits and a civil penalty. In its decision granting the SEC’s summary judgment motion, the court first found that the defendant had made material misrepresentations and omissions, noting the evidence that the defendant, using a variety of screen names, had posted numerous and at times inconsistent messages touting certain stocks and suggesting that those stocks would reach various target price levels. The court pointed out that many of the companies whose stock the defendant touted were actually reporting net losses in their public filings around the time he was making his predictions and that specific price predictions are violative of the antifraud provisions of the federal securities laws if there is “no adequate basis” for the representations. The court added that the defendant had a duty to disclose that he was in control of the Weekly Penny Picks site to counteract the implicit representation that the site was an independent source of information. In the court’s view, the defendant’s statements that the predictions made in the postings could be corroborated by predictions and information included on the Weekly Penny Picks site were “without question made misleading to potential investors” by the omission of the fact that the defendant, himself, was responsible for the content of the site. It then ruled that these omissions and misstatements satisfied the materiality requirement of Rule 10b-5. INTENT TO DEFRAUD The court also easily found that the defendant’s material misrepresentations and omissions had been made in connection with the offer, sale or purchase of securities, and that he had acted with the intent to defraud in that he could not have reasonably believed in his price predictions and had intended to deceive investors when he failed to disclose in his postings referring to his site that he was solely responsible for the content of that site. Accordingly, the court ruled that the SEC had established all of the elements of its claims under the antifraud provisions of the federal securities laws and was entitled to judgment. It entered a permanent injunction restraining the defendant from further violations of the antifraud provisions of the federal securities laws; an order requiring the defendant to disgorge $22,312 in gains he allegedly had made, plus prejudgment interest; and an order requiring the defendant to pay a civil penalty of $50,000. It should not be assumed that improper online stock touting is the sole province of spammers, scalawags and schemers. In fact, often corporate officers, who post information either on message boards or even company blogs, may be perilously close to violating federal security provisions. Even more problematic is the corporate officers who may offer their opinions without identifying themselves or their affiliation. WHOLE FOODS INCIDENT Take as an example the alleged escapades this past summer of Whole Foods CEO John Mackay. Using an anagram of his wife’s name, Mackay allegedly made pseudonymous postings on Yahoo! Money message boards that bragged about the value of the stock, Mackey’s performance as CEO (and his good looks) and that offered fair weather predictions as to the company’s performance. Most problematically, the pseudonymous postings came to light when Mackey’s alleged disparaging “down talk” of its chief rival in the organic supermarket business, Wild Oats, was cited as evidence in the FTC investigation to halt Whole Foods’ acquisition of Wild Oats as anti-competitive. The conduct led to an informal investigation by the SEC. Although the investigation did not lead to formal charges, it continues to be quoted in the FTC’s ongoing litigation against the Whole Foods-Wild Oats merger. A related issue is the use of company message boards to generally discuss the company or new products during the “quiet period” imposed by the SEC prior to taking action on an initial public offering. The quiet period precludes a company or its officers from touting the company or the potential value of the stock before the SEC permits the public offering. Prior to Google’s IPO, the company was seen as a maverick in its ability to publicly market its new products as well as a proposed online code of conduct. In comparison, the IPO of online company Salesforce.com was reportedly delayed when its chairman gave an interview to The New York Times during the quiet period. Although the information may be more reliable than that offered by the spammers, there is no doubt that improper stock promotion by corporate officers can ultimately negatively impact stock evaluation. CONCLUSION For people who regularly use e-mail, spam that pushes a stock is not necessarily surprising. What may be surprising is the extent to which e-mail touting stock has an effect on the market; that may be because people are more likely to buy stocks they know about or because people are often seeking “good deals.” Internet message boards also offer the opportunity to e-mail spammers to push stock, and even some corporate executives apparently have taken to postings, anonymously or pseudonymously, on message boards. The SEC’s recent publication “Internet Fraud: How to Avoid Internet Investment Scams” is an excellent resource for anyone who considers investment action based on Internet content or advice and provides a reporting link for those for whom the caveat may be too late. This article originally appeared in the New York Law Journal, a publication of ALM. • SHARI CLAIRE LEWIS, a partner at Rivkin Radler in Uniondale, N.Y., specializes in litigation in the areas of Internet, domain name and computer law. She can be reached at [email protected].

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