Whole Foods, Unwholesome Practices: Will Sock Puppeteers Be Held Accountable for Pseudonymous Web Postings?
| Citation | Vol. 5 No. 1 |
| Publication year | 2008 |
Abstract
The Federal Trade Commission recently exposed Whole Foods' CEO John Mackey for having made pseudonymous posts on financial message boards for over seven years. Mackey's practice of "sock puppeting," or posting under a false identity to praise and build support for one's company, is becoming more common among high-powered corporate executives who have few other outlets in which to vent their frustrations and spar with their critics. In July, the SEC began an informal investigation into Mackey's posts. This article examines the liabilities sock puppeteers may face under current securities regulations, particularly § 10b-5 of the Securities Exchange Act of 1934 and Regulation Fair Disclosure ("FD").
Introduction
For nearly eight years, John Mackey, the CEO of Whole Foods Market, used a pseudonym to make posts on Yahoo! financial message boards, promoting stock of his supermarket chain and bashing competitor Wild Oats Markets, which Whole Foods was bidding to acquire.(fn2) Mackey's online comments are an example of a new practice, known as "sock puppeting," in which individuals post on message boards under false identities to praise and build support for their own companies.(fn3) The Securities Exchange Commission ("SEC"), in order to determine whether Mackey will be held liable for his actions, is now informally investigating every word of the over 1,200 posts Mackey made from January 1999 to August 2006.(fn4) This article will first define the practice of sock puppeting and suggest why it has recently come under scrutiny by the SEC. Next, the article will discuss possible liabilities for sock puppeteers under securities law, including possible violations of both anti-fraud and selective disclosure provisions. Finally, this article will address how the practice of sock puppeting may impact securities law in the future. These issues will be considered through the context of the recent exposure of John Mackey's history of pseudonymous posting.
Sock Puppeting and the SEC
"Sock puppeting" is defined by the New York Times as "the act of creating a fake online identity to praise, defend or create the illusion of support for one's self, allies or company."(fn5) Based on this definition, the practice of sock puppeting appears to be an updated version of the "cybersmears" that haunted corporations throughout the 1990s.(fn6) "Cybersmearing" has been defined as "the practice of anonymously posting messages on the Internet through the use of message boards and chat rooms, which assert disparaging, or even defamatory rumors or statements about a company, its executives, or its stock."(fn7) "Cybersmearing" received SEC attention when companies and investors began using it as a market manipulation device.(fn8)
In recent cases, sock puppeting appears to have distinguished itself from cybersmearing by being used more as a means of bolstering one's own company than as a method of adversely affecting another company. Although stock prices may be affected by this practice, the purpose of sock puppeting may center less on manipulation of securities and more on building support for and defending one's company against critics.(fn9) Regardless of the puppeteers' precise intent, sock puppeting is becoming a pertinent concern to corporations as it becomes a more common practice among company executives.(fn10) Paul Kedrosky, author of the blog Infectious Greed, states he is "convinced this [Mackey's behavior] is the tip of the iceberg" when it comes to business people and sock puppeting.(fn11)
While the temptation to make pseudonymous posts may be difficult for some company leaders to resist, the practice could result in severe repercussions to both the company and the individual if the sock puppeteer is exposed.(fn12) Pseudonymous posting can create liability through allegations of fraud, deceit, and market manipulation.(fn13) It is imperative that the SEC begins to clarify the application of securities laws, specifically §10b-5 of the Securities Exchange Act, to fraudulent practices, such as sock puppeting, that have arisen out of recent technological advances.(fn14)
The SEC has clarified some of the risks of sock puppeting. Namely, if the statements made by corporate executives under pseudonyms are perceived by the public to be insider information, securities markets and stock prices could be inflated or deflated accordingly.(fn15) Any false or misleading statements Mackey made about either Whole Foods or Wild Oats could be regarded as an attempt to manipulate either company's stock, a clear violation of securities regulations.(fn16) Under the relevant securities laws, false or misleading statements by pseudonymously posting CEOs could lead to financial and/or criminal liability.(fn17) The SEC will likely be investigating Mackey's posts for two main securities violations--statements that include false information and statements that violate selective disclosure statutes.(fn18)
Liability Under Securities Law
While many of Mackey's posts will lead to little more than public humiliation,(fn19) posts that could be of legal significance, however, include predictions regarding the stock performance of Whole Foods and Wild Oats.(fn20) For example, Mackey wrote in June 2006, "So long as Whole Foods same store sales are in double digits the next 2 quarters, the stock won't trade below $50 per share (and probably not below $60)."(fn21) Disparaging remarks by Mackey about Wild Oats will also likely be scrutinized by the SEC, such as: "Whole Foods is systematically destroying their [Wild Oats'] viability as a business--market by market, city by city,"(fn22) and "[Wild Oats] still stinks and remains grossly overvalued based on very weak fundamentals. The stock is up now, but if it doesn't get sold in the next year or so it is going to plummet back down. Wait and see."(fn23)
Securities law experts suggest that Mackey's comments could violate securities laws for a number of reasons.(fn24) These...
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