A group of Wall Street executives and Securities and Exchange Commission officials was unable yesterday to come up with any immediate solution to the complex problem of takeover rumors that cause stock prices to rise or fall dramatically.
The difficulty in finding a regulatory solution to the problem of rumor-planting and stock market manipulation was emphasized by New York Stock Exchange Chairman John Phelan, one of the participants in the SEC forum, when he confessed that he was not sure how to define a rumor.
"I don't know what a rumor is," Phelan said. "What is the difference between a rumor and street chatter? I think we need a definition of a rumor."
After the group debated the pros and cons of an SEC proposal to offer rewards to informants who provide information about rumor planting, SEC Chairman John S. R. Shad asked if anyone had other solutions to suggest. None of the experts responded to his question.
Meanwhile, Shad and other high-ranking SEC officials acknowledged that the fundamental problem is identifying the origin of rumors.
"If you have ever tried to track a rumor to its source, it is almost impossible to do," Gary Lynch, the SEC's enforcement director, said during the meeting. Afterward, Lynch added, "I think everyone involved recognizes the difficulty of these issues."
The key issue the SEC faces is what, if anything, to do about the proliferation of market rumors that have triggered wide swings in stock prices of companies that are labeled "takeover targets." Although sharing of information, including stock tips, is an integral and accepted part of the stock market, many experts believe that with the proliferation of mergers, professional traders increasingly are planting takeover rumors to manipulate stock prices for profit.
Ironically, one company that was the target of takeover rumors earlier this year was Wall Street giant Merrill Lynch, the nation's largest retail stock broker. "These rumors seem to be used by professional traders to generate market activity," Merrill Lynch Chairman William Schreyer said yesterday.
Schreyer called for an SEC review of the rules governing what companies rumored to be takeover targets can say in response to inquiries from the press and investors. One of the key problems in fighting rumors, Schreyer said, is that regulations discourage companies from disclosing when rumors are false.
As a result of Schreyer's remarks, it is likely the SEC will review the disclosure rules that were adopted in a recent case involving Carnation Co. A Carnation spokesman had responded to press inquiries about a potential takeover by saying, "We are not negotiating with anyone." Meanwhile, Carnation stock was rising and Carnation's top executives were involved in merger negotiations with Nestle S. A. in Switzerland.
After Nestle acquired Carnation, the SEC launched an investigation that led to a clarification of the disclosure rules. The commission said that public companies have a duty to refrain from making public statements that are "false and materially misleading." The commission further specified that when a company that is aware of nonpublic merger negotiations makes a statement, it must disclose sufficient information not to be "materially misleading."
The SEC also said that a company that does not want to disclose merger negotiations may, under certain circumstances, respond with "no comment" to press inquiries. However, the commission said that the "no comment" response would not be appropriate in situations where a company previously has made a statement that has been rendered false by subsequent events.
For example, if Merrill Lynch had said rumors that it was involved in negotiations to be acquired by AT&T were false, and then Merrill subsequently became involved in negotiations with AT&T, Merrill would not be allowed to respond to future inquiries with a simple "no comment." Schreyer said the problem with this rule is that it leads most companies to adopt a policy of responding with "no comment" to all inquiries. Instead of killing rumors by saying they are false, the "no comment" response often leads to continued speculation, Schreyer said.
The Merrill Lynch chairman suggested the rule be changed to give companies the flexibility to say rumors are false one day and to refuse comment the next day, even if a company is involved in negotiations with the rumored suitor.
The most controversial proposal discussed yesterday was Shad's suggestion that the commission pay informants who provide information about illegal insider trading or rumor planting. Reaction was mixed, with American Stock Exchange Chairman Arthur Levitt Jr. leading the opposition.
"I personally am unalterably opposed," Levitt said. "It is repugnant. I just don't like it. I couldn't be more strongly against it."