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 Back in September 2000, the Securities and Exchange Commission settled a suit against Jonathan Lebed, a New Jersey teenager who had made at least $800,000 by talking up stocks in Internet chat rooms. The case, which made it all the way to the cover of The New York Times Magazine, illuminated how the Internet was further blurring the already-thin line separating investment amateurs from the pros and was making it even more difficult to distinguish reasonable opinion from market manipulation.
Well, six years later, the situation has gotten even murkier and more encompassing. Not only has the Internet, post-Lebed, flourished as a tool for those who want to pump — or dump — certain stocks (see Mark Cuban's Sharesleuth.com, for example), it's also emerged as a perfect medium for participants in the increasingly popular shareholder rights movement. This was made clear by a recent situation in London where Bobby Hashemi, the founder and executive chairman of Coffee Republic plc, a chain of coffee shops, was forced to resign following a shareholder revolt waged against him primarily in Internet chat rooms. According to press accounts, a U.K. businessman, Steven Bartlett, helped launch the anti-Hashemi campaign after Coffee Republic refused him permission to open a franchise in southwest England. Bartlett eventually acquired close to a 14% stake in the chain and reportedly was in contact with 45% of its shareholder base though ADVFN.com, an investing Web site similar to The Motley Fool. Bartlett, who posted on ADVFN under the name "CockneyRebel," also hooked up with Peter Breach, another investor who had accumulated an 11% stake in Coffee Republic. Coffee Republic is routinely credited as the first company to bring U.S.-style coffee bars to Britain. But the economic downturn of 2001 hit the company hard, and Hashemi has since been seeking to transform it from a large chain of coffee bars to a smaller chain of delis run mostly by franchisees. In their campaign, however, Bartlett and Breach claimed that Hashemi, the holder of 2% of Coffee Republic's shares, was not rolling out new franchises quickly enough. According to press reports, the rebel shareholders also complained that Hashemi "ran the company as a fiefdom" and "accused him of understating how well it was doing in order to buy it for less than it was worth." Indeed, rumors that Hashemi was planning a management buyout became so plentiful on the Internet that Hashemi in September explicitly denied them and blamed them for causing volatility in the company's shares and scaring away potential franchisees. In a letter to shareholders, he wrote: "Despite repeated denials by the company, speculation has continued that management plans a buyout of the company. Let me make this as clear as I can: There was no management buyout plan and there is no management buyout plan." One month later, with Bartlett and Breach poised to call an emergency general meeting, Hashemi stepped down, clearing the way for the pair to be named chairman and chief executive, respectively, in what London-based Breakingviews.com said was "the first time retail investors have successfully ganged up to claim a high-profile executive scalp." Surprisingly, not a word about the Coffee Republic affair has been written in the U.S., despite its media's obsession with shareholder rights. Breakingviews sees the Coffee Republic affair as a warning to other small companies. "The Internet has put much more power in the hands of retail investors," it says. "It also raises questions about how investors use that power. Perhaps its [sic] time regulators took a closer interest in what goes on in Internet chatrooms too." But that brings us back to Lebed. The SEC allowed Lebed to keep about $500,000 of his trading profits, suggesting that even the agency could not articulate exactly what the teenager did wrong. After all, analysts, fund managers and corporate executives talk up stocks all the time; was Lebed doing anything different? (These days, Lebed, now 22, profiles new stocks in the Le- bed.biz Newsletter, blogs on the market and runs an investor relations firm.) If Breach and Bartlett did spread false rumors about a Coffee Republic buyout — Breakingviews points out there is no suggestion that they did — what could or should be done about it? Analysts, journalists, investment bankers and corporate executives speculate about buyouts all the time, often putting companies in play to the benefit of speculators. The Internet makes that situation more complex, allowing more people, amateurs and pros alike, to do the speculating and reach more people with their musings — true or false, sane or insane. If Coffee Republic is any sign, corporate governance may well be evolving into a long political campaign in which just about anything goes. We've spilled a lot of ink over the past few weeks commenting on The New York Times' apparent obsession with nailing Morgan Stanley's John Mack for passing on insider-trading secrets to Pequot Capital Management's Art Samberg. The Times has theorized — both on its front page and on its editorial page — that Mack is getting a free pass from the SEC because of his fundraising ties to President Bush. We, in turn, have theorized that Mack's relationship with Bush, along with his working on Wall Street — a place that in the Times' book ranks somewhere between Sodom and Gomorrah — have fed the paper's fixation with this story, which has featured little in the way of hard evidence. Now another media outlet, the right-leaning The New York Sun, has noticed the Times' obsession with this story but has offered another view on what might be driving the Gray Lady — Mack's connection not to Bush, but to Morgan Stanley. "That is the bank that, earlier this year, withheld its proxy votes for members of the board of the New York Times Co. to protest the Sulzberger family's preferential voting status," a Sun editorial noted on Oct. 26. "A Morgan Stanley analyst complained at the time that the Times was underperforming as a business in large part because of the ossified management perpetuated by the ruling family's use of super-voting shares to control the Times despite a relatively puny stake in the Times company." As conspiracy theories go, this one is a doozy, as it suggests that the Times is targeting Mack and Morgan Stanley in retaliation for the battle the firm waged against its board earlier this year. That is pretty difficult to fathom, though we suppose not entirely out of the realm of possibility. The Sun sounds more credible, however, when it chides the Times for not disclosing its management's clash with Morgan Stanley in any of its Mack-Samberg coverage — an omission the Sun claims "was certainly noticed around town." But we'd add that this isn't the first time the Times has failed to disclose salient information about its Morgan Stanley coverage. Back in 2005, when then-CEO Phil Purcell was being attacked by the so-called Group of Eight, the lead Times reporter on the ongoing story was Landon Thomas Jr., who had worked for Morgan Stanley beginning in 1994 and was fired by the firm four years later. The Times never disclosed Thomas' ties to the firm, even as he continued to cover the Purcell mess. Thomas' byline has not shown up on any of the Mack-Samberg stories, at least not yet. — Yvette Kantrow Categories Deal Video
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