by Bill Singer, Esq.

Chat rooms, forums, and bulletin boards are repositories of questionable information from faceless people, often hiding behind assumed identities.  Yet, millions of investors are drawn daily to Internet investment-related sites, apparently believing that they can pan through much of the online garbage and find some nuggets of gold. But what happens when our e-prospectors strike fool's gold?  

On March 29, 2001, the United States Securities and Exchange Commission (SEC) filed a complaint in the United States District Court for the District of Columbia1 alleging that on Friday afternoon, December 3, 1999, Sean E. St. Heart (St. Heart), age 25, received a telephone call from someone engaged by NCO Group, Inc. (NCO), a public company in accounts receivable management services.  Apparently St. Heart was being dunned by NCO about an unpaid debt subject to  collection.  

We might assume that St. Heart was quite upset at the call because the SEC further alleged that during the evening, he posted a message on the Yahoo! Finance Internet message board (Yahoo Board) in which he falsely claimed that he, as the President and CEO of St. Heart Productions, together with twelve other companies, had prepared a $20 million lawsuit against NCO for its "business practices." In fact, St. Heart (1) had not prepared such a lawsuit, (2) had not joined with any other company in connection with such a lawsuit, and (3) had no basis to claim that he had been damaged in the amount of $20 million.

Initially, one might view this is an early April Fools joke, but the result was far from a laughing matter.  The SEC alleged that St. Heart's message prompted NCO's stock to drop over the following two trading days from $49 9/16 to $34 5/19 ( a decrease of $12 3/16 or 28 percent), and that the trading volume surged to a ninefold increase relative to average daily volume.

Simultaneously with the filing of the SEC's complaint, St. Heart, without admitting or denying the allegations, consented to the entry of a judgment permanently enjoining him from violating the antifraud provisions of the federal securities laws - Section 10(b) of the Securities Exchange Act of 1934 and Rule 10b-5 thereunder. St. Heart further consented to the entry of a judgment that waives the imposition of a monetary penalty based on his demonstrated inability to pay.

This case is interesting on a number of levels.  First, it is yet further proof that it's not always so simple to hide your true identity on the Internet.  The SEC found St. Heart.  Second, those infuriating posters who persist in this abusive conduct may now need to worry about federal prosecution.  Third, this is yet another example of how susceptible the stock market is -- even in this high-tech age -- to rumors.  

However, in the final analysis the outcome is troubling.  Thousands of investors may have lost a great deal of money if they mistakenly sold NCO in response to St. Heart's posting.  Who should they blame?  The easy answer is St. Heart.  But what does that get the public investor?  Based upon the SEC's waiver of a monetary penalty, it appears that the malefactor in this matter lacks significant assets.  So if the investors sue St. Heart there's a good chance they will recover nothing --- and will incur legal fees in the offing.

Is Yahoo to blame?  Chat rooms, forums, and bulletin boards are repositories of questionable information from faceless people, often hiding behind assumed identities.  Not exactly reliable sources of information.  Some might argue that Yahoo should censor and/or monitor its sites.  But for what?  How would Yahoo have known that St. Heart's postings were false?   

What could investors reading St. Heart's posting have done?  Well, they could have telephoned NCO and asked for verification.  They could have checked the major, reputable news services for confirmation.  They could have contacted the SEC.  However, in recent months we have seen that even professional news organizations can be duped by what appears to be bona fide press releases on behalf of real companies.  Further, calls to most regulators, including the SEC, rarely elicit an immediate answer and often are forwarded to a recorded message --- not the prompt help needed in the face of a fast-developing story.  

Ultimately, most investors faced with the scenario presented in the St. Heart case will have to make a critical decision:  sell or hold.  Such a determination should be based upon a well-thought-out investment strategy, not simply in response to a rumor.  Wall Street has a time-honored adage:  Don't buy or sell on news.   We might consider updating that to include online messages.  

¹SECURITIES AND EXCHANGE COMMISSION v. SEAN EDWARD ST. HEART, Civil Action No. 01-CV-00695 (D.D.C.) (TPJ) (filed March 29, 2001); also see,http://www.sec.gov/litigation/litreleases/lr16947.htm
(SEC Release #34-16947, March 29, 2001).