Commentary: Stocks: What You Can And Can't Say In Chat Rooms

Just what can investors say about their stocks these days? The Securities & Exchange Commission is watching Internet investment chat rooms like a hawk--and grabbing headlines by charging college and even high school students with fraud and manipulation. So it's easy to see why investors might feel like Big Brother is looking over their shoulders every time they visit Raging Bull. And it's a creepy feeling. After all, what investor hasn't declared that a favorite stock is "going through the roof" or "bound to double"--if not in a chat room, then at a cocktail party or on the golf course?

Well, you can relax. It takes more than just an over-the-top message, online or off, to attract the securities cops. But in its eagerness to police the Internet, the SEC is scaring a lot of law-abiding investors. The agency needs to do a better job of spelling out the law so that even chat-happy investors will know when they have nothing to fear.

Here's the rule: Your rave or rant won't land you in front of a judge unless it's deemed to be part of "a device, scheme, or artifice to defraud," as the Securities Exchange Act of 1934 puts it. And it takes more than a few intemperate postings to meet that test. Indeed, most of the Internet scammers who've settled charges with the SEC have gone far beyond just peppering the message boards.

Consider Jonathan G. Lebed, the 15-year-old from Cedar Grove, N.J., who agreed on Sept. 20 to surrender $273,000 in profits from 11 stock trades. The SEC charges that Lebed bought thinly traded stocks, then flooded Yahoo Finance's boards with up to 600 messages boosting the shares under a variety of false names. Typical messages: Man Sang Holdings, a stock Lebed allegedly targeted twice, was "the most undervalued stock in history," and its price--then $2 a share--would hit $20 "very soon." As his buying and messages created a flurry of activity and drew other investors, Lebed would sell out--sometimes posting limit orders with his broker so he wouldn't miss a price spike while he was attending high school.

The SEC charged Lebed with stock manipulation--making false statements with the intent of moving the market. Lebed didn't admit to the charges but agreed to surrender his profits. His attorney didn't return calls seeking comment.

SEC charges usually turn on false statements. But how can an opinion--"this stock is headed for $20," for example--be deemed true or false? Courts have ruled that such statements have to be based on a "genuine belief" that they're true, and that belief must be backed up by behavior. "If I say, `This $2 stock's going to $20,' but I have a limit order to sell when it hits $5, it's pretty hard to sustain an argument that I genuinely believed in my statement," says Stephen M. Cutler, deputy director in the SEC's Enforcement Division.

While the SEC can sue over false statements alone, most frauds turn on behavior as well. Whether it's selling the shares that the scamster is promoting or issuing a phony press release like the one that set off a run in the stock of high-tech company Emulex recently, "it's the actions that prove that the intent was to manipulate," says securities defense attorney Lee A. Pickard of the Washington firm Pickard & Djinis.

TOKYO JOE. Corporate insiders and investment advisers face stricter standards under the law, because they have duties to shareholders or clients. One of the few Internet defendants to contest the SEC's charges is Yun Soo Oh Park--better known as Tokyo Joe--who allegedly used his Web page and e-mail alerts to tout stocks to subscribers while he was selling his own shares. The SEC contends that Park was an investment adviser required to disclose his own selling of recommended stocks. Park's attorney maintains he wasn't an adviser and had no such duty.

At base, Internet stock frauds are no different from the scams of the ticker-tape '20s. "The law applies just as well to the Internet as to the telegraph," says Stuart J. Kaswell, general counsel of the Securities Industry Assn. The Internet has made fraud easier: Would-be manipulators can reach a vast audience of investors far more cheaply, and those investors seem to be conditioned to accept what they read on the Web as gospel. But the Net has raised the stakes: Fraudsters use chat rooms to mingle with honest investors, and both leave a clear electronic trail that the SEC can trace almost instantly.

Still, unless you go out of your way to create a stir in a stock's trading, the SEC isn't going to target you. Fraudsters, on the other hand, always have you in their sights, hoping you'll fall for their anonymous tips. On the Web, what you read is far more likely to get you into trouble than what you write.