Should investors take comfort in the news that the Securities and Exchange Commission is investigating “Johntw,” the as-yet unidentified rumor mongerer who briefly drove Apple (AAPL) down nearly 10% Friday before Apple PR finally broke its silence and let it be known that Steve Jobs had not, in fact, suffered a heart attack? (link)
Not necessarily.
As anybody who follows the company knows, rumors about Apple — negative and positive — are as common as crabgrass. This one, posted on CNN’s iReport site, was particularly egregious, as it hit Apple where it is most vulnerable. CNN and Fortune are both owned by Time Warner (TWX).
CNN says it is cooperating with the investigation, giving the SEC what information it has about Johntw (most likely limited to an IP number and an e-mail address), and it is possible that the Feds will get their man. Or woman.
But then what? Although SEC Chairman Christopher Cox supposedly declared war against false rumors in July when Fannie Mae and Fannie Mac were getting clobbered by short-sellers, he admitted to the Senate Banking Committee at the time that before he stepped up the plate, the SEC had never before in its 75-year history brought market manipulation charges against a trader who was knowingly spreading lies.
It’s true that in April Cox’s SEC made an example of a trader named Paul Berliner, charging him with securities fraud for spreading a made-up story (via instant messages to traders in brockerage firms and hedge funds) that the Blackstone Group was renegotiating the price it had agreed to pay to acquire Alliance Data Systems — all while Berliner was selling ADS short, according to the SEC. (See here.)
“The message of this case is simple and direct” Cox thundered in the accompanying press release. “The Commission will vigorously investigate and prosecute those who manipulate markets with this witch’s brew of damaging rumors and short sales.”
But what did Berliner pay for his alleged crimes? He agreed to settle the charges by “disgorging” $26,129 in profits and interest, paying a penalty of $130,000 (the maximum), and consenting an order barring him from futher association with any broker or dealer. (link)
Will $130,000 dissuade anyone who is making millions at this game?
In his famous video interview with TheStreet.com — since removed from YouTube — CNBC personality and former hedge fund manager Jim Cramer told viewers how simple and profitable the game can be — especially with stocks like RIM (RIMM) and Apple.
Take Apple before iPhone came out, he says on tape, “it’s very important to spread the rumor that both Verizon and AT&T decided they didn’t like the phone… and this is very easy because the people who write about Apple want that story and you can claim that it’s credible because you spoke to someone at Apple because Apple doesn’t issue any statements.”
It may be illegal, he adds, but it’s easy to do “because the SEC doesn’t understand it.” (link)
The SEC now says it understands what’s going on — although if they catch Johntw they still have to prove he (or she) was trying to profit from the false post. But it’s not at all clear — especially with everything else that’s going on in the market — that Cox has the resources to catch the thousands of Internet day traders who try to work this con every day of the week.
Or the teeth to make any punishments stick.
JPMorgan Chase (JPM) CEO Chase Jamie Dimon, for one, wants the SEC to toughen its sanctions.
“I think if someone knowingly starts a rumor or passes on a rumor, they should go to jail,” he recently told Charlie Rose. “This is even worse than insider trading. This is deliberate and malicious destruction of value and people’s lives.” (link)