Can corporations protect their investors against fake news stories ?

News categories: stakeholder relationship management and corporate reputation management

On September 20 the Securities and Exchange Commission of the United States accused a 15-year-old high school student of developing a scheme to increase the prices of nine obscure, low-price stocks he had bought by sending numerous optimistic messages to investing chat rooms on the Internet. As other investors read his messages and bought the shares, prosecutors said, Jonathan G. Lebed sold his holdings. The scheme began in August 1999, when Mr. Lebed was 14, the prosecutors said, and continued until Feb 4 this year and earned him almost $273,000 in illegal gains. SEC officials said it is the first time the agency has brought charges against a minor. The case demonstrates the risks of Internet stock tips. “I implore investors to be highly skeptical of any advice they receive from the Internet. People should do thorough research before making investment decisions and verify all information before acting on it,'' said Ronald C. Long, administrator of the SEC's Philadelphia office, which handled the case.

But it is not just investment tips distributed via Internet chat rooms which are challenging increasingly not only a corporation’s investors but also corporate investor relations policies and corporate reputation. As the Emulex case from last month is proving, the trend that individuals are manipulating stock price related information for their own advantage via the Internet is affecting and threatening in the meanwhile also professional news agencies perceived so far as reliable information sources for private and professional investors. Emulex’s share price fell more than 60 percent in the first hour of trading on August 25 after a faked press release has been distributed which stated that the company’s chief executive had resigned and that Emulex had been forced to restate 1998 and 1999 earnings, as well as revise the fourth quarter to a loss form a gain. The Costa Mesa, California /USA based company makes electronic components that connect computer systems to network storage devices. The sharp decline in Emulex shares prompted Nasdaq officials to halt trading until the company was able to issue a response denying that the purposed press release came from Emulex. But for many investors, who sold their shares to quickly in an effort to “stop losses” it was already to late. When trading in Emulex resumed, shares rocketed back to nearly the level before the fake press release has been published leaving those investors who sold their shares unnecessarily with significant losses. The fake release was distributed first through Internet Wire, a Web-based news dissemination service and was picked up about half an hour later by several financial services including Bloomberg, Dow Jones and CBS MarketWatch. The false release carried the company’s logo and included a valid company contact name and telephone number. Internet Wire spokesman said its client, which include Emulex, provide it with press releases to distribute to news wires and services. As it turned out in the meantime, the fake release was sent in to Internet Wire by a 23-year-old college student who had been employed by Internet Wire. Because he new the processes at Internet Wire, he was able to circumvent the safeguard the company has in place to guard against fraud. The e-mail included not only language that reflected familiarity with the procedures used at Internet Wire, but also a representation that the sales department at Internet Wire already had reviewed the matter. The student, who’s fake e-mail was traced back by federal investigators to his school and who was arraigned in California on charges of securities fraud and wire fraud, earned two times through his manipulations: First he was covering a short position in Emulex just after the release was issued realizing a profit of more than $54,000. Minutes later he purchased 3.500 Emulex shares, which he then sold three days later at a profit of more than $186,000. (more about the Emulex case …)

Can corporations protect themselves and its investors against such misinformation ? With the raise of the Internet and the free uncontrollable information flow facilitated through the net, this has become quite difficult. A possible solution could be more transparency and to allow investors and other corporate stakeholders to access financial and other business performance information directly through a web based self service whenever necessary. Traditional quarterly reporting is not very helpful. It covers only financial information and allows for example no insight into development of intangible assets, a significant source of future earnings and which represents in many new economy companies the earning capability per se. Even more problematic with traditional financial reporting is, that it is very static and does not allow investors and other stakeholder to analyse this information according to their actual needs. A solution could be to put financial and other performance information into a data base, which could be accessed via a web portal and web tools by investors and stakeholders themselves, allowing them to run interactive simulations based on actual corporate data. Another scheme could be, to give access to this type of data bases only to professional agents, who are executing this type of analysis for private investors and other interested parties as a service. They could also serve as “voting agents” for private investors. Often private investors do not have the time and information to make this type of decisions themselves and would normally not exert their shareholder voting rights.

This new models of corporate reporting and investor information services are discusses by corporate executives, auditors and other experts not only because of problems with security and wire fraud. A equally important reason for corporations, auditors and investors to look for new reporting solutions is the change in expectations concerning corporate governance. Corporations which are moving to a more stakeholder and investor related scheme, can earn a significant premium on their stock price, corporate reputation and brand value.

… more about an Intenet based shareholder proxy voting model

… more about an new IT based model for public disclosure

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