Ever worry about the power of the Internet? Read on…

On November 29, 2007, Mr. Paul Berliner of the trading firm Schottenfeld Group sent an instant message to thirty-one of his Wall Street associates. Referring to a credit card processing company called Alliance Data Systems (AD), which was in talks to be acquired by Blackstone Group, Berliner wrote he was “hearing the AD board is now meeting on a revised proposal from Blackstone to acquire the company at $70/share, down from $81.50.” The suggestion was that AD’s value was deteriorating and Blackstone was lowering its offer.

The market freaked. AD’s price tumbled by 17% as traders sold their positions as fast as they could. The New York Stock Exchange had to put a temporary halt to trading in AD stock. The phone lines between AD, Blackstone and the SEC were jammed with calls. AD quickly issued a press release that this was all an ugly rumor. The rumor was squashed, trading resumed, and by day’s end, AD’s stock price rebounded to its opening level. Just a little hiccup in the markets, right?

Y’right. Today, after an investigation of six months, the SEC has concluded that Mr. Berliner created the rumor to make a quick buck. As the price of AD tumbled, he “short sold” AD stock and pocketed over $25K in less than 10 minutes. Although he won’t admit any guilt, Berliner has to repay that amount, plus another $130K for good measure, and is banned from future trading.  SEC Chairman Christopher Cox has called email and IM manipulation of stock prices a “witch’s brew” of potential problems, but that the SEC is capable of overseeing it. A lot of industry execs aren’t so sure. Many are calling for increased oversight. Congress is looking into it.

So, have no fear for your 401K. Our financial markets are in good hands. Y’right.