NEW YORK (CNNfn) - A bogus report published earlier this week about a possible buyout of PairGain Technologies Inc. underscored the dangers of relying on the Web for investor information.
Shares of the Tustin, Calif.-based maker of high-speed telecommunications products soared early Wednesday amid a report that an Israel-based firm, ECI Telecom, would acquire the company for $1.35 billion in cash and stock.
The news sounded great to investors who gobbled up PairGain (PAIR) stock early in the day. Investor enthusiasm soured -- and the stock price dropped -- when it turned out the article was false.
Investors found out about the news through a message board in Yahoo! Inc. 's (YHOO) Finance site, which included a link to an article on PairGain. The link brought investors to a page that was formatted to look like a Bloomberg news site.
Bloomberg later published a story denying that it published the report. ECI and PairGain officials also denied any deal between the companies.
It's not the first time investors have been led astray by phony tips and reports on the Web, and it won't be the last.
Yahoo! includes a disclaimer on its Finance home page that information included on the site is not intended for trading purposes. But like other online discussion forums, Yahoo! Finance doesn't discriminate between who can or can't participate.
Also, given the large volume of messages that make their way through a given message board, it's virtually impossible for Yahoo! or any other Web site to check the veracity of posted messages.
"I think the right approach is investor education," said Mike Riley, senior producer of Yahoo! Finance. "We provide a wealth of tools to verify information that appears in the message boards. Someone could easily have gone to our site to check to see if there was a press release or a wire story" on a PairGain merger.
What made Wednesday's incident particularly insidious is that investors were led to believe the information came from a reputable news service, not merely rumor mongering among investors.
Advances in technology have made it possible for anyone with a little initiative, some free time and a mean streak to mimic Web sites that provide legitimate information.
"Even if it had been a legitimate story, it's not out of the question that it could have been wrong. Corrections are printed all the time," Riley said. "It behooves investors to check different sources."
Free stock? Not exactly
The Internet has, of course, made it easier than ever for rumors to spread faster than the Ebola virus, and government officials have stressed that investors need to double- and triple-check tips received from the Internet.
Recently, newsgroup threads and e-mail chain letters touting "free stock" from a company called Monsterbook.com, which provides a directory listing of online businesses and organizations, has made the rounds to potential investors. (The letter even made its way to CNNfn.com.)
The messages tantalize readers with the opportunity to gain free shares of the company simply by referring others to obtain the free directory.
"This company is giving away free shares, like Yahoo did at its launch (the last company which tried this is now listed on the Nasdaq)," the letter states. "Note: CNBC says this company will go through the roof when it launches
Do it quick!!!"
The letter was a little misleading, however. Monsterbook.com did indeed have a referral program, under which the company offered its first 1 million members $10 for each friend its subscribers referred to the company.
The $10 would be paid "if and when [the company] files for an initial public offering of shares in the future." Recipients could elect to receive their $10 in cash "or apply it toward the purchase of stock in Monsterbook.com."
If you've ever tried to participate in an IPO, then you'd know a $10 referral bonus isn't exactly a "free stock" offer.
Tips like these have caught the attention of the Securities and Exchange Commission. A spokesman for the commission's enforcement division would not comment on whether the SEC is investigating the phony PairGain story.
But the SEC has long advised investors to research any tips they receive from online newsletters or bulletin boards, especially when it comes to companies that don't file regular reports with the commission.
Earlier this year, SEC Chairman Arthur Levitt issued a statement to investors to exercise caution in using information obtained from the Internet for investment purposes.
"I say to all investors -- whether you invest on-line, on the phone, or in-person -- know what you are buying, what the ground rules are, and what level of risk you are assuming."
In other words, let the investor beware.
-- by staff writer John Frederick Moore