The brewing legal conundrum over online message board postings recently washed ashore at Huntington Beach-based surfware maker Quiksilver Inc.
Last spring, Quiksilver filed suit to find out the identity of a person who had been posting disparaging online comments about the company and personal attacks on Chief Executive Robert McKnight. In the process, the company ended up accusing the licensee of two Quiksilver stores in Hawaii with defamation and other actions. The suit was dismissed in October, after Quiksilver acquired the Hawaii stores for “a nominal price” a source close to the company said.
Company officials declined to discuss the specifics of the lawsuit. And while the charges never were aired in court, Quiksilver’s lawyer characterized the outcome as a win for companies facing online attacks.
“People who thought that the Internet provided a cover for defamation and unfair business practices are discovering that their cover has holes,” said Quiksilver attorney Michael G. Yoder of O’Melveny & Myers LLP in Newport Beach.
According to court documents, Quiksilver last spring sued to ferret out the person behind the screen name Eddie_Would_Invest. In the process, they subpoenaed Yahoo! Inc. and Critical Path Inc., operator of the RagingBull.com site.
The subpoenas identified Hawaiian attorney Miles Furutani as the person allegedly behind the Eddie postings. Furutani was the majority owner in a company called Quik Concepts Inc., which operated two Quiksilver Boardriders Club stores in Honolulu.
Amended Suit
Once Quiksilver attorneys had who they believed to be Eddie’s true identity, they amended their lawsuit and charged Furutani with defamation, breach of contract and intentional interference with prospective economic advantage.
Reached by phone in Hawaii, Furutani declined to comment on the lawsuit or postings by Eddie_Would_Invest.
Eddie bent the ears of investors with hundreds of postings on Quiksilver message boards, according to the company’s lawsuit. Quiksilver lawyers contended that the messages disclosed confidential information regarding the company’s operations and defamed and disparaged it and its management.
In one message that refers to Quiksilver by its stock symbol, Eddie accused the company of cooking the books: “ZQK was not going to meet earnings. So what did they do? They pre-shipped merchandise to pre-book income and raise the earnings.”
Quiksilver hasn’t been suspected of or investigated by regulators for falsifying accounting information.
Eddie posted messages over a seven-month period accusing the company of mismanagement, poor business practices and faulty products, among other things. The Eddie character also charged Quiksilver with using Hawaiian surfer Eddie Aikau’s name and ripping off his family to make money.
“ZQK is like any other company and if they can make money off a surfing legend why not? Even if it means ripping off the Aikau family,” said one message posted in January 2000.
The message postings ceased in March 2000, the suit said. Around the same time, negotiations ended for the sale of the two stores, which are among the Quiksilver brand’s top performers and set on prime Honolulu real estate. The lawsuit was dismissed seven months later.
A source close to the company said the issue was settled after Quiksilver threatened to turn over what it believed to be Eddie’s true identity to the Securities and Exchange Commission.
In Quiksilver’s suit, the company asserted that Eddie’s messages seemed to coincide with a bid to sell the stores owned by Furutani back to the company in exchange for stock. Eddie had posted messages telling stockholders that Quiksilver should buy back its retail stores, according to the suit.
“At the same time Furutani was disparaging Quiksilver and negotiating for the purchase of Quik Concepts’ two Hawaii stores, he was aggressively pushing for Quiksilver to buy up its independently owned Boardriders Clubs,” the lawsuit said.
Quiksilver also accused Furutani of using Internet messages in a bid to depress the company’s stock for financial gain, according to the suit. The company claims that Furutani wanted to sell his stores in exchange for company stock.
“Furutani carried on his campaign of defamatory and disparaging messages for the purpose of depressing the price of Quiksilver’s shares on the public market to benefit Quik Concepts and himself in any transfer of Quiksilver shares in connection with the proposed buyout of Quik Concepts’ two Boardriders Clubs,” the suit said.
The Quiksilver case is one of many similar rows between companies and those who post online messages. Some local examples include one filed by Ingram Micro Inc., the Santa Ana-based computer products distributor, in which the company subpoenaed Yahoo in August to learn the identities of critics it believed were former employees.
“The targets of this conduct are certainly using the courts to fight back and they are having some success,” said Quiksilver lawyer Yoder. “It’s fair to say that once the identity of the poster is uncovered, the jig is pretty much up. That’s been the experience that these targets are having in court as these actions are filed.”
More recently, 2TheMart.com, Irvine, subpoenaed the names of a group of online messengers it claims were trying to short the company’s stock and drive down its value with negative postings. Short sellers borrow shares in hopes they can replace them at a lower price sometime in the future. While the practice itself is legal, trying to manipulate a stock can violate securities law.
Costa Mesa-based Emulex Corp. fell victim to one of the biggest online scams involving a phony press release posted on the Internet. The scam brought the company’s stock price down 62% in one day, leading to a federal investigation and charges against former college student Mark Simeon Jakob, who pled guilty to securities and wire fraud in December.
“It certainly seems fair to say that this happens more often than it gets caught,” said Tom W. Bell, an assistant professor of law at Chapman University in Orange.
Two years ago, the Securities and Exchange Commission established a special unit to combat online fraud. Since then it has brought charges against more than 250 individuals and companies for everything from “pump and dump” schemes and manipulation of stocks to issuing phony press releases, e-mail messages and message board postings.
Bill Gay, partner in the business and finance practice of Snell & Wilmer LLP in Irvine and vice chairman of the California State Bar Association’s Cyber Space Law Committee, said his firm recently was able to silence one Internet poster who was making claims about a client, a former race car driver.
“Someone was trying to pump up the stock of a fuel additive and saying that our client endorsed it and was working with the company,” Gay said. “We joined the chat group and paid the annual fee and then posted a notice asking where they heard this person was involved in the company. Then we posted a message saying we are his counsels and to knock it off because he’s not involved. It worked.”
Free Speech
But policing the Internet has its limits.
“Everybody is entitled to hold and express an opinion about whether or not a business is being run properly,” Chapman’s Bell said. “Query, though, whether that right extends to statements of opinion expressed solely to manipulate a stock price. I’d not want to have to try and prove intent in a case like that.”
While Quiksilver may have silenced Eddie, a new poster, EddieW37, has emerged on the company message board. Contacted via e-mail, EddieW37 said he has no ties to the former Eddie_Would_Invest.
Back in July, with Quiksilver’s lawsuit against Furutani still pending, EddieW37 wrote: “Eddie Would Invest: Please come back. We all miss you. Really we do I’ll even pay you $3 a post. We need some action around here.”
One investor wasn’t amused by the plea: “With all due respect why would you make such a plea! These boards are not for frivolous entertainment but to learn and discuss stocks. The vindictive person who you wrote about (I will not even write his/her name) does not deserve to ever have HIS/HER name spoken on this thread again. Respectfully, daTRUTHjack.” n
