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
• Cyber Space
• How do we determine the
identity of the speaker in
ordinary space?
• How do we determine the
identity of the speaker in
cyber space?
• How do we attribute
responsibility to speaker for
ordinary space speech?
• What are ordinary space
limits in reaching an
audience?
• 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
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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/ethics
www.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