Personal Finance

Web of deception

Investors can be burned by Internet stock tips

ROSS LAVER June 16 1997
Personal Finance

Web of deception

Investors can be burned by Internet stock tips

ROSS LAVER June 16 1997

Web of deception

Personal Finance

Investors can be burned by Internet stock tips

Say what you will about the Internet: no other technology makes it so easy to apologize to thousands of complete strangers. Last month, it was David Tan’s turn to beg forgiveness. Until recently, Tan was a participant in an Internet forum dedicated to swapping information about Bre-X Minerals Ltd. Like many other members, Tan was an ardent Bre-X supporter, convinced that independent tests would vindicate the company’s claim to have discovered the world’s largest known gold deposit. When the claim proved a hoax, most of the group’s other Bre-X backers ran for cover, but not Tan. “I, for one, am guilty of posting several rumors I heard from other investors, brokers, etc.,” he confessed in a message to the Silicon Investor Web site on May 5. “My apologies to anyone burnt by our posts. Anyway, to make things short, I lost a lot of money—money I can ill afford to lose.”

Tan’s mea culpa came too late to help other Silicon Investor members, but the Bre-X affair nevertheless underscored the growing influence of Internet stock forums. By providing an outlet for exchanges among individual investors around the world, computer bulletin boards have become vital sources of information and gossip—some of it malicious and much of it inaccurate—about publicly traded companies. In the month prior to the release of new drilling results from Bre-X’s

Indonesian property, more than 10,000 messages were posted on Silicon Investor’s BreX “thread,” or discussion area. The thread became the international clearinghouse for news and rumors about the company. Postings from the site were frequently quoted in the media, pushing the stock up or down as investors searched frantically for clues to the truth behind Bre-X’s gold claim.

Of the 10 major Web sites that host stock market discussions, Silicon Investor is the busiest, with about 60,000 registered members.

In addition, thousands of non-members surf in every day to access the service’s stock-charting functions, industry comparisons and company profiles. The most popular service is StockTalk, comprised of about 15,000 threads devoted to individual stocks. Only members are allowed to post messages, which can then be read by anyone who visits the site.

Silicon Investor, which has been on-line since 1995, is owned by Jeff and Brad Dryer, two brothers aged 29 and 27 respectively who live in San Jose, Calif. According to Jeff Dryer, they launched the service to give small investors a better shot at keeping up

A sampling of stock market forums on the World Wide Web:

SILICON INVESTOR http://techstocks.com

MOTLEY FOOL http://www.fool.com

DBC STOCKCHAT http://www.stockchat.com)

STOCKCLUB

http://www.stockclub.com

with the big money players. Brad Dryer, a former programmer for a mutual fund company, supplied much of the technical knowledge, while his brother, who has an MBA, focused on business issues. Together, they say they have invested $600,000, mostly for computers and a high-capacity Internet connection. They hope to turn a profit by charging membership fees and selling advertising space to financial service companies.

Not surprisingly, investment professionals tend to look askance at Web sites such as Silicon Investor. Fred Ketchen, managing director of equity trading at Scotia McLeod in Toronto, says many participants appear to be using on-line forums for ill-gotten gains—attempting either to inflate a company’s shares or to undermine confidence in the firm so they can buy the stock at a lower price. “I would like to see some regulation,” says Ketchen. He cites the case of Gandalf Technologies Inc., a Nepean, Ont.-based company whose shares recently doubled in one day. ‘The company didn’t know why, and the activity seemed to be the result of a rumor on the Internet.” Ketchen admits regulation would be difficult, but says one way to discourage manipulation would be to insist that forum members use their real names. As it is, many participants conceal their identities behind nicknames. On the Bre-X thread, the participants included Furry Otter, Big Dude, Woody and Goldman.

Despite the criticism, Jeff Dryer doubts his creation has as much clout as some suggest. “I’ve followed some postings by people hyping penny stocks to see if there was any correlation with the price of the stock, and I couldn’t really see any impact.” He adds that investors who join on-line forums know better than to believe everything they read.

Nor are forum participants immune from prosecution. Last year, a software company in Salt Lake City called Fonix Corp. took exception when misleading information about its products and personal attacks against its senior executives were posted on Motley Fool, an investment forum on the America Online network. When the network refused to identify the person who posted the comments, Fonix launched its own investigation and traced the material to a Salt Lake City stockbroker. In October, Fonix settled out of court with the broker, who issued a public apology and agreed to buy 5,000 company shares and hold them for five years—proof that in cyberspace, talk isn’t always cheap.

ROSS LAVER

DAVID ZGODZINSKI