Cyber-ethics, Business Ethics, and Short Selling: The Biomatrix Case

William J. Frey, Jose Cruz,Chuck Huff (St. Olaf College)

Student Research Teams (UPRM & St. Olaf College)

Case Development Initiatives

• NSF Grants: DUE 9972280 & DUE 9980768, Dr. Chuck Huff PI– www.computingcases.org

• Establish online repository of complex, historical cases in computer ethics

• Basis for practical, virtue oriented approach to computer ethics: – Good Computing: A Virtue Approach to Computer Ethics

Some things to think about…

before we get started

1. Free Speech is a right

• Which of the following forms of speech should be protected?

–Speech that notifies of impending harm (whistle-blowing)–Child Pornography–Defamation (slander and libel)

Definition: Defamation

• “communication that harms the reputation of another and lowers that person’s esteem in the eyes of the community”

• “libel refers to written or printed defamation, and slander refers to oral defamation”

– Richard Spinello, “Internet Service Providers and Defamation: New Standards of Liability”

Internet Service Providers (ISP)

• Provide online forums through which individuals speak– Serve to channel Free Speech

• Examples: Prodigy, CompuServe, AOL and Yahoo

• Universities can also be treated as ISPs– Industrial Engineering Web Page (posting cv & discussions

between students and alumni)– kypo.net

2. ISP Responsibility for Defamation

• Are ISPs responsible because they exercise editorial control over the speech published?– Should they be treated as publishers?

• Are ISPs not responsible unless they are notified of defamatory speech and fail to remove it in a timely fashion?– Should they be treated as distributors?

• Are ISPs not responsible unless they knew beforehand that speech was defamatory and did nothing to stop its transmission?– Should they be treated as common carriers?

– Richard Spinello, “Internet Service Providers and Defamation: New Standards of Liability”

What, me worry?• Juicy Campus

– “Just remember, keep it Juicy”– “students found their social skills, weight, grooming habits, sexual

orientation, and/or promiscuity to be the subject of gleefully vicious discussion by unseen online classmates.”

• Remember from Toysmart. The Internet instruments…– Really fast copying, world-wide dissemination, and it never, never

disappears.

• Juicy Campus bred Reputation Defender.– New Internet business that searches online for defamatory and

derogatory comments . Then they take measures to get it removed.

– Bennett, Drake. “Time for a Muzzle” Boston Globe. www.boston.com/bostonglobe/ideas/articles/2009/02/15/time_f…” Accessed 4/03/09

3. Free Speech in Ordinary and Cyber Space

• Ordinary Space

• How do we determine the identity of the speaker in ordinary space?

• How do we attribute responsibility to speaker for ordinary space speech?

• What are ordinary space limits in reaching an audience?

• Cyber Space

• How do we determine the identity of the speaker in cyber space?

• How do we attribute responsibility to speaker for cyber space speech?

• What are cyber space limits in reaching an audience?

Facts & Issues in Biomatrix

A case combining elements of business and cyber ethics

Abstract• Biomatrix manufactures a medical product called Synvisc, a lubricant

injected into the knee to take the place of natural lubricants that disappear with age. From April 1999 to August 2000, a series of messages (16,000 in all) highly critical of Biomatrix were posted on a Yahoo bulletin board. These messages, sent by three individuals operating under 23 pseudonyms, make a series of critical claims about Biomatrix officials, employees, financial status, and products. Biomatrix vigorously denied each of these claims. Yet the quality and quantity of this information may have had negative effects on the financial well being of the company. During the period in which the negative messages appeared in Yahoo, Biomatrix stock dropped from $35 per share to $21. Biomatrix petitioned the court to subpoena Yahoo to provide the real identities of the persons sending the messages. As a result, Yahoo identified three individuals, Raymond Costanzo and Ephraim Morris, both former Biomatrix employees, and Richard Costanzo, the twin brother of Raymond. Costanzo, Costanzo, and Morris were all found guilty of defamation

What does Biomatrix manufacture?

• Biomatrix is a biotech company that manufactures a medical product called Synvisc

• Synvisc is a lubricant injected into the knee to take the place of natural lubricants that disappear with age

• The disappearance of these natural lubricants along with the wearing of cartilage produces pain and immobility in the knee, a condition called osteoarthritis

• Injecting Synvisc into the knee is called visco supplementation

Cybersmear

• From April 1999 to July 2000, a series of messages (16,000) highly critical of Biomatrix were posted on a Yahoo bulletin board

• These messages falsely claimed… – serious side effects for Synvisc– that competitors offered better products– that Biomatrix had covered up negative financial and health

information– that sexual improprieties had been committed by top level Biomatrix

employees

Techniques (How was the Cyber Smear carried out?)

• Internet Service Providers (ISP) make available substantial numbers of interested listeners at little or no cost– Yahoo message board in Business & Finance Section

• Ease of copying allowed users to monopolize forum by crowding out other messages – 16,000 postings brought about by copying the same message and posting

under different usernames

• Anonymity– Each of the three individuals used five or more pseudonyms– Created illusion that they could operate without responsibility (moral or legal)

Techniques

• Several pseudonyms created the impression of a large number of individuals posting

– cd_438; cd_43eight; cd_43eightt;– rvcrvcrvc_1964; allergictochickenbits;– dr_stedman; meddra_2000; meddra_2k;– voteREP; voteREPLCN; vote_republican_2000;– jenti_is_pro-life

Sample Messages: Claiming Inside Knowledge

• Implying inside information added credibility

– “I am a former Biomatrix employee. I was employed there for over 6 years and reported DIRECTLY to the CEO, Dr. Balazs. While employed, I ran the AC Chemistry Lab which tested production batches of every product manufactured for a variety of CHEMICAL IMPURITITES and general conformance to established specifications. I had many other responsibilities as well…. When it comes to CREDIBILITY, consider the source.”

Sample Messages: Corporate Smear

• “The BMX Police are here to warn investors that corrupt financial institutions, along with the CRIMINAL Biomatrix and Genzyme management, are trying to STEAL YOUR MONEY by misleading investors with FALSE PROMISES of a ‘merger’ that is not even scheduled to happen.”

• “Genzyme and Biomatrix will be SUED FOR INVESTMENT FRAUD as soon the [sic] cancellation of this ‘merger’ is made public. Indeed Genzyme and Biomatrix management is SOOOOOOO [sic] nervous about the pending lawsuit that they will DELAY the announcement as long as possible…. But the BXM Police will remain to help guide investors through this difficult period. We will be posting FACTS and the TRUTH that Genzyme and Biomatrix are trying DESPERATELY to hide from their investors.”

Sample Messages: Personal Smear

• “Most of you that work there I’m sure already know how much [X] LOVES her women. Just don’t reject her offers or you’re out the door.”

• [Y] “is rumored to have been a NAZI SS doctor during World War II…torturing people and experimenting on them like animals.”

Sample Messages: We are the BMX Police• SLANDER = WHISTLE BLOWING

– By meddra_2k• It all depends which side of the fence you’re on.• The “pusher” sees the negative information, factual as it may be, as

“slander” because they feel that anything that might make stock go down is inherently wrong. Thus, they call it ”slander”.

• The BMX Police know that the TRUTH, as unpleasant as it may be, is NEVER wrong. Indeed, it is our CIVIC DUTY to expose the TRUTH about Biomatrix, its products, and its stock. Thus, we call it “whistle blowing.”

• The readers of this board are free to evaluate both sides, and their motives for posting, and decide what they wish to do.

• Some will learn that this is a SCAM company peddling a SCAM product and run for the door.

• Others may not mind that it’s a SCAM company peddling a SCAM product as long as the stock price goes up. Certainly, there are enough unethical people out there that won’t mind investing in a SCAM that hurts people as long as they profit from it.

• This message board is FILLED with such people.• Fortunately, it also has a few do-gooders that help balance the EVIL that

men do.

Racial Slurs & Flaming• Message #3• We finally see CD’s true colors• by: klangwon• (posted 2/2/00, # 7283)• I nomally [sic] don’t read CD’s stuff but was scanning today and realized that he had

made a big mistake. His “money-grubbing Jewish SCUM” comment is too much. This anti Semitism cannot continue. I am immediately reporting this and hope others do too. CD finally slipped up. It isn’t the company he is trashing it is their ethnic makeup.

• THIS CANNOT STAND!• Message #4• Klanglost, YOU are Jewish SCUM• By cd_43_eighttt• (posted 2/2/00, # 7285)• MONEY-GRUBBING JEWISH SCUM, that is.• Does THAT annoy you, Klanglost?• Does THAT really piss you off?• Do I fill you with the hate of a thousand NAZIs?• Do you wish you could reach through your computer and strangle the life out of me?• If so, PLEASE STAY AND POST MORE!

Financial Impacts

• These messages appeared while Biomatrix was undergoing turbulent financial transitions– Shareholder suits over withholding financially relevant

information

• Genzyme announced its intention to buy Biomatrix in March 2000

• Biomatrix stock dropped from $35 to $21 after the messages started to appear

Did the negative postings cause financial harm?

• Precedents indicate that this drop could have been caused by negative information posted at Yahoo

• Value of Emulex dropped $61 in 16 minutes when false rumors spread online that they were under SEC investigation

• However SEC reports filed by Biomatrix show other problems that could have led to drop

Motivation of Message Senders

• Revenge– Two of three individuals posting messages against

Biomatrix were former employees

• Short selling– A practice, illegal in certain variations, that allows

individuals to profit from a drop in stock prices

• Flaming– An aggressive, insulting, often obscene communication

style used in cyber space

Short Selling: Third Circuit• Zlotnick v. Tie Communicatons, 86 F.2d 818,820 (3rd

Cir. 1988)• Where the traditional investor seeks to profit by trading a stock the

value of which he expects to rise, the short seller seeks to profit by trading stocks which he expects to decline in value….Short selling is accomplished by selling stock which the investor does not yet own; normally this is done by borrowing shares from a broker at an agreed upon fee or rate of interest. At this point, the investor’s commitment to the buyer of the stock is complete; the buyer has his shares and the short seller his purchase price. The short seller is obligated, however, to buy an equivalent number of shares in order to return the borrowed shares. In theory, the short seller makes this covering purchase using the funds he received from selling the borrowed stock. Herein lies the short seller’s potential for profit: if the price of the stock declines after the short sale, he does not need all the funds to make his covering purchase; the short seller then pockets the difference. On the other hand, there is no limit to the short seller’s potential loss: if the price of the stock rises, so too does the short seller’s loss, and since there is no cap to the stock’s price, there is no limitation on the short seller’s risk. There is no time limit on this obligation to cover.

How to profit from Short Selling

• Borrow 100 shares of X from dealer A at T1 (say Monday, October 4, 2004). X is worth $10 a share at this time so 100 shares of X is worth $1000.

• Immediately sell these 100 borrowed shares of X at its market value of $10 per share for $1000. This still occurs within time frame, T1.

How to profit from Short Selling

• By spreading false rumors about X on the Internet, lower the price of X to $9 a share.

• Post a message in a discussion forum…

• By c_smear

• All people who run corporation X are lying thieves OUT TO STEAL YOUR MONEY. They also DRESS FUNNY too. So SHUN THEM LIKE THE PLAGUE!

How to profit from Short Selling• Buy back the 100 shares of X at T2 (say Thursday,

November 4, 2004) at its new value of nine dollars a share for a total of nine hundred dollars.

• Give the 100 shares of X back to dealer A.

• Pocket the difference between the value of 100 shares of X at T1 (one thousand dollars) and its value at T2 (nine hundred dollars).

• Congratulations! Short selling has just earned you a 100 dollars.

Of course, defamation is illegal

The Legal Trail: Part 1

• Biomatrix, Balazs & Janet Denlinger (plaintiffs), initiated John Doe lawsuit for defamation

– Called “John Doe” because targets are unknown (posters operated under anonymity of user names)

– Plaintiffs demonstrated to a judge sufficient cause for defamation resulting from anonymous messages displayed at Yahoo

The Legal Trail: Part 2

• Court ordered Yahoo to reveal the real identities behind BMX user names

• Raymond Costanzo and Ephraim Morris are former employees of Biomatrix

• Richard Costanzo, twin brother of Raymond, was third message poster

The Legal Trail: Part 3

• Biomatrix, Balazs and Denlinger then sued Raymond & Richard Costanzo and Ephraim Morris for defamation

• Court granted summary judgment

• Costanzos and Morris found guilty of defamation

Legal Procedure Raises Concerns for Civil Rights

• Anonymity protects free speech over the Internet

• John Doe lawsuits could be misused by companies to attack legitimate whistle blowers– “Shoot the messenger”

• Hence rights of defendants (those accused of defamation) must be balanced against rights of plaintiffs (those who claim to have suffered defamation)

Amicus Curiae filed by parties concerned about civil rights

• Additional requirements for uncovering real identities under cyber identities:

– Provide notice to the potential defendant and allow him/her an opportunity to construct a defense

– Require the plaintiff to specify the objectionable statements

– Review the complaint looking for a valid cause

– Require that the plaintiff produce evidence for each claim

– Balance the harms to both the plaintiff and defendant

• Harm (defamation) to plaintiff of allowing the speech to continue• Harm (loss of free speech) to the defendant losing anonymity

Internet Service Provider (ISP) Role• Yahoo, the ISP, became involved in this case in two

ways:• 1. The Messages appeared on a Yahoo Discussion

Forum– Legal distinction: publisher, common carrier, or

distributor?– Publisher implies control and therefore responsibility for

content– Common Carrier or Distributor does not imply control

• 2. Yahoo was issued a subpoena to reveal the identities of the users posting the negative messages– Are they being forced to violate user privacy rights?

Yahoo Investor Warning• Be Careful What You Read– Information posted to message boards should not be used as

a substitute for independent research, and should not be relied on to trade or make investment decisions. Prudent investors do their homework and don’t believe everything they read on message boards. For more information and tips regarding investments and the Internet, please visit the SEC Web site

– Never assume people are who they say they are, know what they say the know, or are affiliated with whom they say they are affiliated. Yahoo! is not responsible for the accuracy of any information posted on the message boards, and is not responsible for any trading or investment decisions based on such information.

– Yahoo! reserves the right to edit, refuse to post, or remove any content

Yahoo warning to those who would post messages• Be Careful What You Post

– Yahoo! takes user privacy very seriously and will take reasonable measures to respect your privacy. However, under special circumstances, such as to comply with subpoenas and other legal obligations, Yahoo! may provide personally identifiable information which may include IP addresses. Please see the Yahoo! Terms of Service for more information.

– Never assume that you are anonymous and cannot be identified by your messages.

– Violations of Yahoo!’s policies may result in the termination of your Yahoo! account (including loss of your access to Yahoo! Mail).

Mill against censorship

• Free Speech can be limited only by the harm principle: speech can harm self but not others.

• Argument has three parts…– The opinion in question is completely true– The opinion in question is partially true– The opinion in question is completely false

• 1. The content of the speech is true. In this case, censorship is wrong because it denies society of the benefit of the truth. This is the most obvious case of the wrongfulness of censorship.

•

• 2. The content of the speech turns out to be (only) partially true. In this case, censorship is still wrong because it suppresses part of the truth and thus denies society its benefits.

•

• 3. The content of the speech is entirely false. This is the test case. If censorship is wrong even when the view suppressed is entirely false, then this is the telling argument. For Mill, censorship is wrong even if the suppressed speech turns out to be entirely false, because suppressing the false deprives the truth of clarity which is achieved by contrasting the true with the false and vigor which is purchased by defending the true from the challenges of the false.

Who is the speaker?• In a famous Supreme Court Decision,

corporations were granted non-commercial free speech rights

• The majority opinion claimed that the speaker was irrelevant.– Making the speaker relevant would lead to

discrimination and injustice

• The minority opinion raised the argument that corporate free speech would drown out all other speech (Why?)

What is the OSP Responsibility?

• 1. Is the OSP responsible as publisher– Does Yahoo have control over the content of messages?

How could it gain such control

• 2. Is the OSP responsible as distributor?– Here, Yahoo only has to remove content upon complaint.

Think about what Google does when copyright holder objects to YouTube video

• 3. Is Yahoo responsible as common carrier. – That is should it preview what is about to be published and

prevent that which is objectionable?

It’s not over yet• Google executives were tried and found guilty in

abstentia of invasion of privacy by Italian Government

• They allowed a video to be posted in YouTube showing a child with Downs Syndrome being abused by schoolmates

• Video remained on YouTube for an extended time

• Parents asked Google to remove it which they did promptly after.

The Issues

• The parents argued that this violated the privacy of their son

• Google argued that this interferes with free speech– They also argued that it would be practically

impossible to act as a common carrier and censure content as it enters YouTube commons

Appendix

Free Speech & Censorship: Some Legal Issues

Censorship & Free Speech

• Disapproving speech (criticism) that attempts to suppress other speech is not censorship. (It is a part of conversation and social influence.)

• To qualify as censorship, you need some authorized person or entity to disapprove and to attempt to suppress or deter it.

– Suppress: to make ideas or communication unavailable (attach speech on supply side)

– Deter: to punish on both supply and demand side, both the providers and consumers of speech

Free Speech and the Law

• 1973: Miller V. California case

• Pornography

– Depicting sexual (or excretory) acts – Depicting these acts in a patently offensive manner

appealing to purient interests as judged by a reasonable person using community standards

– No serious literary, artistic, social, political, or scientific value

Conclusion

Thank you

Visit www.uprm.edu/ethicswww.computingcases.org

Free Speech and the Law

• 1996 to 1997: The Communications Decency Act (CDA)– Struck down except for Child Pornography Protection Act and

section 230

• 1996 to 2002: Child Pornography Protection Act– Declared unconstitutional– Child pornography = depictions that “appear to be” or are

“modified to appear that” or “conveys the impression” that a minor is engaging in sexual acts.

– Outlawed a broad range of literature and art