On February 23, 2001, Judge David O. Carter of the United States District Court for the Central District of California dismissed a case brought by Global Telemedia International, Inc. and others alleging trade libel, libel per se, and interference with contractual relations and prospective economic advantage against several defendants who had posted critical messages on an Internet chat-room.[i]  On March 29, 2001, the United States Securities and Exchange Commission (SEC) filed a self-styled Internet securities fraud case against Sean Edward St. Heart (St. Heart) in the United States District Court for the District of Columbia[ii]; simultaneously with the filing of the complaint, the defendant, without admitting or denying the allegations, consented to the entry of a judgment[iii] permanently enjoining him from violating the antifraud provisions of the federal securities laws.[iv]  Globaland St.Heart depict fairly similar online conduct but present very different outcomes; the former case proceeding by way of a civil suit between private parties and the latter, prosecuted by the SEC.  Further, Globalwas a victory for the accused posters; whereas, St.Heart ended with the defendant consenting to the entry of a permanent injunction. 

Getting a Handle on Chat Rooms

Public companies continue to come under attack from online posters.  Although easily dismissed as so much harmless white noise on the Internet, in truth, such activity may be quite damaging.  Many investors visit online bulletin boards or chat rooms for what they believe is insight and analysis about companies they own or intend to invest in.  Consequently, online pundits have the ability to sway investor opinion.  Sometimes --- actually frequently --- their postings are caustic, bombastic, and vindictive. Then again, so is the commentary by many on-air analysts.  However, online messages have great staying power, often remaining posted for months and years. More importantly, on-air experts speak with full disclosure of their identity; whereas, online posters hide behind the anonymity of a “handle.”[v] 

Consequently, at some time the modern securities practitioner is likely to receive a call from a public-company client complaining about a critical online posting.  Typically, the client will be incensed about perceived defamatory comments. Seasoned attorneys will counsel such clients to exercise caution before filing suit.  We will warn about antagonizing otherwise harmless individuals.  We will stress the danger of a public lawsuit exposing the innermost workings of the company to enhanced scrutiny.  Finally, we will explain the legal standards differentiating between protected First Amendment speech and actionable defamation.  And as most skilled counsel knows, such caution will often fall upon deaf ears. 

Global is an excellent case for counsel to provide to his or her dyspeptic client.  This beautifully reasoned and deftly written decision explains the often-insurmountable challenge of free speech.  On the other hand, St. Heart is an equally instructive case; one that offers the prospect of enlisting the SEC to fight your client’s case --- an intimidating and cost-effective alternative.  

Global:  Raging Bull?

Plaintiff Global Telemedia International, Inc. (GTMI) is a telecommunications company that publicly trades on the National Association of Securities Dealers’ OTC Bulletin Board, also known as the Electronic Bulletin Board (OTCBB)[vi].  Plaintiff Jonathon Bentley-Stevens (Stevens) became President of GTMI in June 1999. Raging Bull is a financial website that features message boards dedicated to a single publicly traded company. These boards or chat rooms are open to the public and free of charge, and posters often use handles. The covered company does not sponsor the boards. Defendant Reader aka ELECTRICK_MAN and Defendant King aka BDAMAN609 began posting messages on Raging Bull’s GTMI board in March 2000. 

On March 25 and 26, 2000, Defendant Reader posted messages critical of GTMI’s plans. He claimed that “their real life product is so slow or non-existant”  and “several of their products are just plans on the drawing board (do not exist).” He also posted the following: 

SEC link[.] To view Jonathon Bentley Stevens violations: http://www.sec.gov/enforce/litigrel/lr15774.txt[.]  He was busted for misrepresentation and overstatement of the facts:  Let the truth be told . . . 

Defendant King posted at least 57 messages between March and October 2000.  On June 12, 2000, he posted the following comments: 

[a]nother day with GTMI steering the sinking ship, but don’t worry they are headed for the calmer waters of the carribean where your money will be safe from federal authorities. 

[w]e are being manipulated by the company so that they can fly the coop again . . .

On October 2, 2000, Defendant King posted the following: 

[y]ou have been screwed out of your hard earned money here its time to talk about a lawsuit. 

A few days later on October 7, Defendant King posted the following: 

Plaintiffs initially brought the case in state court for trade libel, libel per se, and interference with contractual relations and prospective economic advantage against several posters. Defendants then removed the matter to federal court, upon which they filed their motions to strike. The Court characterized the Plaintiffs’ lawsuit as “a result of less-than-flattering postings about GTMI on the Internet.”  The Defendants brought motions to strike pursuant to California Civil Procedure §425.16, citing their belief that the suit was a “transparent effort to intimidate and silence individuals who are critical of Plaintiffs’ corporate performance.” 

Anti-SLAPP Protection

Judge Carter initiated his analysis of the case by referencing the legislative intent of the California State Legislature in passing §425.16 in 1992: 

[T]here has been a disturbing increase in lawsuits brought primarily to chill the valid exercise of the constitutional rights of freedom of speech and petition for the redress of grievances. The Legislature finds and declares that it is in the public interest to encourage continued participation in matters of public significance, and that this participation should not be chilled through abuse of the judicial process.  To this end, this section shall be construed broadly.[vii] 

The lawsuits covered under the statute are generically known as SLAPP suits (Strategic Litigation Against Public Participation).  Under §425.16 a cause of action arising under the public-interest considerations noted above is subject to a special motion to strike, unless the court determines that the plaintiff establishes a probability of prevailing on the claim.[viii] 

Judge Carter characterized §425.16 as permitting a dismissal of a lawsuit if: 

1. Defendant can demonstrate that the alleged bad acts arose from his/her exercise of free speech in connection with a public issue, and
2. Plaintiff cannot demonstrate a probability of success on the claims.

Is It a Public Issue?

Consequently, the Court first turned to the issue of whether Defendants’ speech was in connection with a public issue. Turning to the statute, the Court noted that the “in connection” test could be satisfied if the objectionable statement was made “in a place open to the public or a public forum in connection with an issue of public interest.”[ix]  Plaintiffs attacked this prong by arguing that Defendants were not exercising protected free speech, but were engaged in unprotected, defamatory, commercial speech about a company that is not of public interest.  Essentially, Plaintiffs argued that to deny their position would be to eliminate any viable tort of business defamation. 

The Court characterized GTMI as a publicly traded company with as many as 18,000 investors that inserted itself into the public arena through the issuance of numerous press releases. Judge Carter described publicly traded companies with thousands of investors as, ipso facto,of public interest, owing to the impact of their successes or failures on their shareholders --- and in the case of larger companies, owing to their impact on market sectors or markets as a whole.  To underscore its conclusion, the Court noted that the existence of a chat room dedicated to GTMI with over 30,000 postings was yet further proof of the public’s interest.  

Responding to the Plaintiff’s concern that the Court’s application would serve to eviscerate business defamation cases, Judge Carter noted that prior cases interpreting anti-SLAPP provisions have carved out a competitor exception[x] and do not apply the protection to suits where there is no public issue.  Nonetheless, Judge Carter noted that the Defendants were not competitors of GTMI and the lawsuit involved a public issue.  Further, even assuming that Defendants establish a prima facie case that the basis of the claims arose from acts in furtherance of free speech in connection with a public issue, the result is merely a shifting of the burden of proof to Plaintiffs to demonstrate a probability of success. 

Under the Totality of the Circumstances

No Harm, No Foul

Having dismissed the postings as opinion and not fact, the Court nonetheless examines whether Plaintiffs could even show damages arising from the postings.  Plaintiffs contended that the postings negatively impacted GTMI’s stock price and that Defendants intended to produce such a result.  The Court notes that Defendant King’s first posting on March 17, 2000 was a glowing recommendation, but that the stock subsequently fell in price.  By March 17, 2000 when Defendant King posted his first negative comment, GTMI had already fallen to $.68 --- despite his prior laudatory comments.  Pursuant to further analysis of trading patterns, the Court concluded that Plaintiffs could not show any correlation between Defendant King’s posting and any loss of value and, to the contrary, the stock had previously lost significant value unrelated to the defendant’s postings.  In regards to Defendant Reader, the Court similarly notes that in one instance a week after a negative posting, the stock had actually risen six cents.  The Court granted Defendants’ Motions to Dismiss. 

The SEC Takes Heart

On Friday, December 3, 1999, St. Heart, a California resident, age 25, and the president and CEO of St. Heart Productions, LLC, received a telephone call from an individual whose company had purportedly been hired by NCO Group, Inc. (NCO)[xi], a Pennsylvania corporation that provides accounts receivable management services to its clients (this was the first time that St. Heart became aware of NCO). The caller stated that he was investigating a debt owed by St. Heart.  We might assume that St. Heart was quite upset at the call because the SEC further alleged that at 11:33 p.m. EST he posted the following message under the handle of “seansheart”[xii]on the Yahoo! Finance Internet message board for NCO: 

1. prepared a lawsuit against NCO;
2. joined with any other company to file such a lawsuit; or
3. had any basis to claim $20 million in damages.

NCO Gets a Heart Attack

On the next two trading days following St. Heart’s Friday night posting, his message became disseminated and negatively impacted NCO’s stock price.  On Monday, December 6, NCO closed at $43 3/8, which was down from Friday’s close by $3 3/16 (7%). On Tuesday, December 7, NCO’s stock traded nearly 2.9 million shares (nine times the three-month average daily volume), and had fallen in price to $34 5/16, representing a 28% loss in value from Friday’s close. The two trading days’ declines resulted in NCO’s market capitalization decreasing by over $200 million. On Tuesday, December 7 at 3:22 p.m. EST, Bloomberg ran the first story on NCO’s price decline, quoting from St. Heart’s Yahoo! Posting and citing an analyst’s statement that “[s]hares of NCO . . . fell as much as 23 percent on rumors on the Internet about a possible lawsuit.”  In response to developments, an NCO spokesperson stated that the company “cannot attribute any of the [stock price] decline to any corporate events or disclosure.”[xiii] 

Upon concluding its investigation, the SEC’s Complaint alleged that 

13. St. Heart knew or was reckless in not knowing that his message concerning a lawsuit to be filed against NCO was materially false and misleading and would materially impact NCO’s stock price.

14. St. Heart’s conduct involved fraud, deceit, manipulation, and deliberate or reckless disregard of the law, and his violation directly or indirectly resulted in substantial losses or created a significant risk of substantial losses to other persons. 

Consequently, the SEC sought to permanently restrain and enjoin St. Heart from violating Section 10(b) and Rule 10b-5, to which he so consented.  Similarly, the sought civil monetary penalty[xiv] was waived upon St. Heart’s demonstrated inability to pay. 

The St. Heart Transplant:  Putting a Private Civil Case Into an SEC Action?

What is the essence of St. Heart? A private citizen was dunned by a collection agency.  The debtor was upset. Clearly, mischief was afoot. He posts a message claiming he is preparing a multi-million dollar lawsuit with several companies against a NASDAQ-listed collection company.  The poster sought some measure of revenge, and, boy, did he get it!  Nonetheless, Mr. St. Heart settled the SEC’s charges against him.  

But, carefully consider the very opening lines of the Complaint, as stated in paragraph #1 under NATURE OF THE ACTION:  “this is an Internet securities fraud case.” Clearly, this is an Internet case to the extent that the acts at issue occurred on the Internet. Additionally, we might even concede that St. Heart’s statements were fraudulent.  But the bothersome question is: Is this really a federal securities case? 

Is An Intent To Sue Actionable?

For purposes of filing a securities fraud case, the SEC does not seem to distinguish between a statement that a lawsuit had been filed versus the posting by Mr. St. Heart that he has prepared to file a lawsuit that should be ready next week. Perhaps not a critical distinction but, nonetheless, a clear statement that nothing had actually happened as of yet. One could easily imagine on-the-record testimony during which the witness swears that he really, really, reallyintended to file this suit to teach the bastards a lesson, but when I found out the cost I changed my mind.  A plain reading of St. Heartindicates that the poster was charged for the material misrepresentation that he and 13 companies were preparing a lawsuit against NCO. Supposing that Mr. St. Heart posted a message stating that he, personally, was planning to file the exact same suit; or that he was going to contact dozens of companies to enlist them in his case.  Would the SEC have been prepared to file charges based upon an individual’s statement of his intent to sue? 

The “In Connection With” Nexus

Section 10(b) of the Securities Exchange Act of 1934 states in pertinent part that it shall be unlawful “To use or employ, in connection with the purchase or sale of any securities . . . any manipulative or deceptive device or contrivance . . .” Rule 10b-5 further states that it is unlawful to “make any untrue statement or a material fact”[xv] or to “engage in any act, practice, or course of business which operates or would operate as a fraud or deceit . . .”[xvi]  However, the final clause of Rule 10b-5, which modifies the entire rule, clearly requires the following nexus, “in connection with the purchase or sale of any security.” 

Was St. Heart’s posting a fraud in connection with the purchase or sale of any security? Certainly there is nothing in the Complaint or Litigation Release to suggest that St. Heart intended to buy or sell stock. His conduct appears to have been fulminating rage, not a coolly calculated undertaking to lower NCO’s market capitalization.  From the SEC’s perspective one can easily understand why they might view St. Heartas a securities case.  The Defendant’s posting negatively affected the price of a publicly traded stock, and the impact resulted from fraudulent statements.  And, of course, public investors sustained a diminution in the value of their NCO holdings.  

Ultimately we have an unopposed case on the books --- always a recipe for abuse.  There was no real airing of the issues and no testing of legal theories.  St. Heart merely caved in and the SEC got its settlement. One might infer that his declared inability to pay the imposed fine was the motivation behind his decision to settle --- certainly there is no indication that he had legal representation.  More pointedly, would a client represented by legal counsel have been maneuvered into such a vulnerable position --- would the SEC have been able to mount a successful prosecution? 

The dangerous message emanating from this case is that public citizens must be very careful about criticizing publicly traded companies and their management.  If St. Heart’s postings attacked a non-profit organization, a privately-held entity, or an individual, his exposure would have been to a private civil suit. The key issue attracting the SEC was the publicly-traded nature of his target. Strictly from a civil libertarian perspective, I hope that the SEC does not view St. Heart as an opportunity to expand its police powers to the rough and tumble of Internet message boards simply because posters engage in name calling and fail to comport themselves in a genteel fashion.  In the final analysis, public companies can still retain private attorneys to sue those engaged in defamation.  The SEC must be careful not to become the Martha Stewart of the Internet.