Pssst… Heard the buzz? Pfizer’s heartworm medicine is deadly to dogs; Microsoft is about to shut down its Hotmail service; Nokia will give you a free phone if you forward this e-mail.’ These are just some of the lies you may find on the chat boards. Sure, the internet has become an indispensable source of information, but it also hosts a deluge of misinformation. Rumors, hoaxes, hype and slander make chat rooms the epicenter of unsubstantiated babble. A quick glance at Yahoo!, Raging Bull, Silicon Investor or Motley Fool is all it takes to realize they’re full of baloney. And yet every day IROs tear their hair out as the chatter drives their stocks up and down.
It seems the financial press loves to give delicious coverage of the latest cybersmear or scandal. There’s the one about Ashok Kumar, the US Bancorp Piper Jaffray analyst who supposedly told the chat board about 24 analysts arrested for securities fraud. Not to mention Lucent Technologies’ press release that dropped the company’s stock price by $7.1 bn – only, Lucent never issued that release. These stories may sell subscriptions, but they don’t do much to help the bamboozled companies.
On the bright side
Without a doubt, the internet is as much a curse as it is a blessing. But on the bright side, many IROs use chat boards to their advantage. ‘I think it’s useful to monitor them, because they let you know what people are thinking, wrong or right,’ announces Jim Kerr, director of IR at Unisys. ‘And sometimes it makes you become aware of things you didn’t know. The other day I logged on and saw the company had been mentioned on CNBC as a good investment opportunity. The stock was moving and the chat board told me why.’
Kerr admits chat rooms offer good information about the company’s media coverage. While he himself can’t probe each day’s financial press, he monitors the chat rooms to find out when and where the company gets a mention.
Peter Schuman, Coherent Inc’s director of IR and a former NASD securities enforcement agent, says chat rooms give valuable insight into the perceptions of individual investors. ‘I obviously want to see what people are saying. Sometimes I’ll find my stock is moving and I’ll see it’s because of retail pressure. I think with more people trading on the internet, many are using the chat rooms as their sources of information.’
Schuman admits individual investors are not the only ones monitoring these boards. ‘Sometimes a securities analyst or fund manager might approach us and make a comment about what is being said on the boards. I’m amazed at how many fund managers go in there. They actually do look at these things, believe it or not.’
While many investment professionals may go through the motions of monitoring chat boards, few consider them trustworthy or give the information they find on them much credibility. And it’s not difficult to see why: many boards are dominated by noisy, angry minorities.
Still, chat rooms do hold weight. Case in point: New Jersey-based Ariel Corporation. Last year a group of investors mistook it for a different company (the Californian Ariel Communications) and drove the stock from around $5 to $57. Most of the activity happened after the markets had closed for a long weekend. While Wall Street enjoyed its vacation, day traders were dutifully manning their screens. They skyrocketed the stock, and then dropped it Monday when news of their mistake hit the Street. ‘If there is activity that significantly mis-states the facts and impacts the stock price either positively or negatively, then we would consider issuing a press release to set the record straight,’ announces Don DeLaria, president and founder of Deephaven Financial Group. ‘If rumors are being spread in the chat room and they’re having an impact, I’ll usually get phone calls from the major investors asking, What’s going on? What do you know about the trading activity? Why is the stock moving? And if I don’t have an answer for them, it reflects poorly on me.’
DeLaria’s policy is to monitor chat boards, though he admits the chatter would have to be extreme to merit a press release. ‘It’s only when messages are material and they begin to impact the stock that we bring in the company’s legal counsel. We wouldn’t respond to unsubstantiated rumors 98 percent of the time. But if there was also a corresponding effect on the stock – say, a 20 percent swing – that would probably give us cause to at least evaluate whether or not to put out a press release.’
Non-activity
Every once in a while stories circulate about some zealous CEO who actively participates in chat room discussions. There are rumors that some executive issues a report on the same message board every week at the same time, followed by a safe harbor statement. Though it’s a bold tactic, most IROs (not to mention their legal departments) discourage it. ‘Don’t get on the chat board and run the risk of violating a disclosure rule. Once you’ve done that you’ve opened up a Pandora’s box,’ warns Bob Williams, senior vice president of investor relations at Edelman Public Relations. Even a single posting by a corporate executive, he believes, can lead the chat room audience to expect further correspondence. If the executive decides not to comment on a subsequent rumor, posters could interpret this as validation.
‘Typically you have to ask yourself, Who’s the audience you’re trying to reach? and Is this the best vehicle to reach them? Often there’s some controversial stuff in the chat rooms saying the company is about to be acquired or whatever, and management is worried about how the employees are going to react. Well, if that’s your concern, you don’t have to go on the chat board. You can send your employees an e-mail or address the issue in the company newsletter.’
Management needs to be aware not only of what employees hear in the chat rooms, but also what they say. ‘As you move further and further from the executive suite, the less people are sensitive to disclosure issues. The bigger a company is, the truer that statement is,’ Williams explains. ‘So somebody in an office far away from headquarters may know something that they don’t realize is inside information. If they post those things on a message board – while not ill-intentioned – that can amount to a disclosure problem.’
Worldtalk recently released its E-mail Corporate Usage Report, which found 31 percent of corporate e-mail exchanges with the internet pose potential security threats. Studies also show a rise in insider abuse of internet access – often resulting in mud-slinging messages from disgruntled employees – and an increase in cybersmear suits.
Ann Stevens, director of IR at ILEX Oncology and former president of Niri’s San Antonio chapter, advises companies to implement a formalized policy about employee participation in chat rooms. ‘We have a blanket general policy that basically says, regardless of the mode or purpose, company personnel should not discuss internal information with anyone outside of the company.’
But that alone may not be effective. ‘I also come out with an e-mail message to all employees reminding them that it’s important to remember our confidentiality policy, especially during times when sensitive things are going on in the company. It’s kind of an informal way to discourage employees from participating in chat rooms.’
Ounce of prevention
Stevens considers herself lucky because one of ILEX’s most responsible, long-time investors is also very active on Yahoo! ‘He was one of the early participants in chat boards and he has made himself somewhat of an expert in our company just by having held our stock for so long,’ she explains. ‘He was posting messages even before I knew what they were. As the company grew and an active chat board developed, he has continued to be the stalwart among all posters. The others acknowledge him as the guru of our stock.’
Stevens says the guru helps police the message board and his presence sets a high standard for discussions. ‘His participation has been good for us. It’s saved our board from the kind of abuses some others have had.’
Tony Carideo, director of IR and treasury operations at Net Perceptions, says a couple of key posters can help with crisis management. Since his company went public a little more than a year ago, it has drawn more than 12,000 messages on Raging Bull alone. ‘It feels at times like there’s a cult following, where these people exchange e-mail addresses and become friends online – it’s a very odd relationship,’ he admits. ‘They scrutinize every single movement of the stock. When it’s going up, they cheer it almost like a race horse.’
Carideo gets e-mail from posters and he says his replies often end up on the message boards. ‘I don’t have a problem with that because it’s information that I would freely release to anyone. It’s also information that our company has released on prior occasions. You have to be aware that what you put out may be widely disseminated. But that could also happen when you give information to an analyst who posts it to [financial research site] First Call.’
Carideo says there are certain occasions when it’s necessary to respond actively. ‘I would only do that when there is information circulating that is materially incorrect. I would not post directly to the chat room. Instead I’d send an email to one of the posters I know and say, There’s a message on the board that is not correct; here is the correct information.’
Carideo says a brief message to a trusted participant can be the best action. ‘A few months ago there was an uprising on the board where the chatterers decided they were going to spam the company’s officers – they were going to really plaster us with e-mails.’ Carideo says his CEO and CFO began getting a deluge of messages and, in a panic, they forwarded them to him. ‘I responded to one of the posters individually and said, You are more than welcome to send us e-mail and we will do our best to respond to them, but keep in mind that when you do that, it does take our executives’ time away from running our company. Within half an hour the messages had stopped and everyone was apologizing to each other. I think that’s an appropriate thing to do.’ Carideo admits there have been times when the posters have been his stock’s strongest supporters. ‘When the large institutions were selling, these individuals were stepping in and buying it. And to me, our chat board is a very very important constituency.’
Ann Stevens believes the message board has taught her the importance of communicating with individual investors. ‘I think they are very important and I try to treat them the same as the institutions. You never know who of these people may be your chat room posters. So I think it’s in an IRO’s best interest to tell the company’s story and talk with everyone who calls. That’s how you develop the credibility for your department and for your company.
Don DeLaria agrees a good communication flow can go a long way toward helping to prevent rumors. ‘Any IR department that’s worth its salt is out talking with the investors on a frequent basis. Should a rumor start, people will dismiss it unless they heard it from IR. Companies that lose that connection are typically the ones that get hit hard. Your current shareholders can do wonders to help you take volatility out of the stock.’
