Internet
Fraud: How to Avoid Internet Investment Scams
The Internet serves as an excellent tool for investors, allowing them to easily
and inexpensively research investment opportunities. But the Internet is also
an excellent tool for fraudsters. That's why you should always think twice before
you invest your money in any opportunity you learn about through the Internet.
This alert tells you
how to spot different types of Internet fraud, what the SEC is doing to fight
Internet investment scams, and how to use the Internet to invest wisely.
Navigating
the Frontier: Where the Frauds Are
The Internet allows individuals or companies to communicate with a large audience
without spending a lot of time, effort, or money. Anyone can reach tens of thousands
of people by building an Internet web site, posting a message on an online bulletin
board, entering a discussion in a live "chat" room, or sending mass
e-mails. It's easy for fraudsters to make their messages look real and credible.
But it's nearly impossible for investors to tell the difference between fact and
fiction.
Online Investment
Newsletters
Hundreds
of online investment newsletters have appeared on the Internet in recent years.
Many offer investors seemingly unbiased information free of charge about featured
companies or recommending "stock picks of the month." While legitimate
online newsletters can help investors gather valuable information, some online
newsletters are tools for fraud.
Some companies pay the people who write online newsletters cash or securities
to "tout" or recommend their stocks. While this isn't illegal, the federal
securities laws require the newsletters to disclose who paid them, the amount,
and the type of payment. But many fraudsters fail to do so. Instead, they'll lie
about the payments they received, their independence, their so-called research,
and their track records. Their newsletters masquerade as sources of unbiased information,
when in fact they stand to profit handsomely if they convince investors to buy
or sell particular stocks.
Some online newsletters falsely claim to independently research the stocks they
profile. Others spread false information or promote worthless stocks. The most
notorious sometimes "scalp" the stocks they hype, driving up the price
of the stock with their baseless recommendations and then selling their own holdings
at high prices and high profits.
Bulletin
Boards
Online bulletin
boards whether newsgroups, usenet, or web-based bulletin boards
have become an increasingly popular forum for investors to share information.
Bulletin boards typically feature "threads" made up of numerous messages
on various investment opportunities.
While some messages may be true, many turn out to be bogus or even scams.
Fraudsters often pump up a company or pretend to reveal "inside" information
about upcoming announcements, new products, or lucrative contracts.
Also, you never know for certain who you're dealing with or whether they're
credible because many bulletin boards allow users to hide their identity
behind multiple aliases. People claiming to be unbiased observers who've carefully
researched the company may actually be company insiders, large shareholders, or
paid promoters. A single person can easily create the illusion of widespread interest
in a small, thinly-traded stock by posting a series of messages under various
aliases.
E-mail Spams
Because "spam" junk e-mail is so cheap and easy to create,
fraudsters increasingly use it to find investors for bogus investment schemes
or to spread false information about a company. Spam allows the unscrupulous to
target many more potential investors than cold calling or mass mailing. Using
a bulk e-mail program, spammers can send personalized messages to thousands and
even millions of Internet users at a time.
How
to Use the Internet to Invest Wisely
If you want to invest wisely and steer clear of frauds, you must
get the facts. Never, ever, make an investment based solely on
what you read in an online newsletter or bulletin board posting,
especially if the investment involves a small, thinly-traded company
that isn't well known. And don't even think about investing on
your own in small companies that don't file regular reports with
the SEC, unless you are willing to investigate each company thoroughly
and to check the truth of every statement about the company. For
instance, you'll need to:
- get
financial statements from the company and be able to analyze them;
- verify
the claims about new product developments or lucrative contracts;
- call
every supplier or customer of the company and ask if they really do business with
the company; and
- check
out the people running the company and find out if they've ever made money for
investors before.
And
it doesn't stop there. For a more detailed list of questions you'll need to ask
and have answered read Ask
Questions. And always watch out for tell-tale
signs of fraud.
Here's
how you can use the internet to help you invest wisely:
Start
With the SEC's EDGAR Database
The federal securities laws require many public companies to
register with the SEC and file annual reports containing audited
financial statements. For example, the following companies must
file reports with the SEC:
All
U.S. companies with more than 500 investors and $10 million in net assets;
and
All companies that
list their securities on The Nasdaq Stock Market or a major national stock exchange
such as the New York Stock Exchange.
Anyone can access and download these reports from the SEC's EDGAR
database for free. Before you invest in a company, check to see whether it's
registered with the SEC and read its reports.
But some companies don't have to register their securities or file reports on
EDGAR. For example, companies raising less than $5 million in a 12-month period
may be exempt from registering the transaction under a rule known as "Regulation
A." Instead, these companies must file a hard copy of the "offering
circular" with the SEC containing financial statements and other information.
Also, smaller companies raising less than one million dollars don't have to register
with the SEC, but they must file a "Form D." Form D is a brief notice
which includes the names and addresses of owners and stock promoters, but little
other information. If you can't find a company on EDGAR, call the SEC at (202)
551-8090 to find out if the company filed an offering circular under Regulation
A or a Form D. And be sure to request a copy.
The difference between investing in companies that register with the SEC and those
that don't is like the difference between driving on a clear sunny day and driving
at night without your headlights. You're asking for serious losses if you invest
in small, thinly-traded companies that aren't widely known just by following the
signs you read on Internet bulletin boards or online newsletters.
Contact
Your State Securities Regulators
Don't stop with the SEC. You should always check with your state
securities regulator, which you can find on the website of the North American
Securities Administrators Association, to see if they have more information about
the company and the people behind it. They can check the Central Registration
Depository (CRD) and tell you whether the broker touting the stock or the broker's
firm has a disciplinary history. They can also tell you whether they've cleared
the offering for sale in your state.
Check
with NASD
To check
the disciplinary history of the broker or firm that's touting the stock, use NASD's
BrokerCheck
website, or call NASD's BrokerCheck Program hotline at (800) 289-9999.
Online
Investment Fraud:
New Medium, Same Old Scam
The types of investment fraud seen online mirror the frauds perpetrated
over the phone or through the mail. Remember that fraudsters can
use a variety of Internet tools to spread false information, including
bulletin boards, online newsletters, spam, or chat (including
Internet Relay Chat or Web Page Chat). They can also build a glitzy,
sophisticated web page. All of these tools cost very little money
and can be found at the fingertips of fraudsters.
Consider all offers with skepticism. Investment frauds usually fit one of the
following categories:
The
"Pump And Dump" Scam
It's common to see messages posted online that urge readers to buy a stock quickly
or tell you to sell before the price goes down. Often the writers will claim to
have "inside" information about an impending development or to use an
"infallible" combination of economic and stock market data to pick stocks.
In reality, they may be insiders or paid promoters who stand to gain by selling
their shares after the stock price is pumped up by gullible investors. Once these
fraudsters sell their shares and stop hyping the stock, the price typically falls
and investors lose their money. Fraudsters frequently use this ploy with small,
thinly-traded companies because it's easier to manipulate a stock when there's
little or no information available about the company.
The Pyramid
Be wary of
messages that read: "How To Make Big Money From Your Home Computer!!!"
One online promoter claimed that investors could "turn $5 into $60,000 in
just three to six weeks." In reality, this program was nothing more than
an electronic version of the classic "pyramid" scheme in which participants
attempt to make money solely by recruiting new participants into the program.
The "Risk-Free"
Fraud
"Exciting,
Low-Risk Investment Opportunities" to participate in exotic-sounding investments
such as wireless cable projects, prime bank securities, and eel farms
have been offered through the Internet. But no investment is risk-free. And sometimes
the investment products touted do not even exist. They're merely scams.
Be wary of opportunities that promise spectacular profits or "guaranteed"
returns. If the deal sounds too good to be true, then it probably is.
Off-shore Frauds
At one time,
off-shore schemes targeting U.S. investors cost a great deal of money and were
difficult to carry out. Conflicting time zones, differing currencies, and the
high costs of international telephone calls and overnight mailings made it difficult
for fraudsters to prey on U.S. residents. But the Internet has removed those obstacles.
Be extra careful when considering any investment opportunity that comes from another
country, because it's difficult for U.S. law enforcement agencies to investigate
and prosecute foreign frauds.
The
SEC Is Tracking Fraud
The
SEC actively investigates allegations of Internet investment fraud and, in many
cases, has taken quick action to stop scams. We've also coordinated with federal
and state criminal authorities to put Internet fraudsters in jail. Here's a sampling
of recent cases in which the SEC took action to fight Internet fraud:
Francis
A. Tribble and Sloane Fitzgerald, Inc. sent more than six million unsolicited
e-mails, built bogus web sites, and distributed an online newsletter over a ten-month
period to promote two small, thinly traded "microcap" companies. Because
they failed to tell investors that the companies they were touting had agreed
to pay them in cash and securities, the SEC sued both Tribble and Sloane to stop
them from violating the law again and imposed a $15,000 penalty on Tribble. Their
massive spamming campaign triggered the largest number of complaints to the SEC's
online Enforcement Complaint Center.
Charles
O. Huttoe and twelve other defendants secretly distributed to friends
and family nearly 42 million shares of Systems of Excellence Inc., known by its
ticker symbol "SEXI." Huttoe drove up the price of SEXI shares through
false press releases claiming non-existent multi-million dollar sales, an acquisition
that had not occurred, and revenue projections that had no basis in reality. He
also bribed co-defendant SGA Goldstar to tout SEXI to subscribers of SGA Goldstar's
online "Whisper Stocks" newsletter. The SEC obtained court orders freezing Huttoe's
assets and those of various others who participated in the scheme or who received
fraud proceeds. Six people, including Huttoe and Theodore R. Melcher, Jr., the
author of the online newsletter, were also convicted of criminal violations. Both
Huttoe and Melcher were sentenced to federal prison. The SEC has thus far recovered
approximately $11 million in illegal profits from the various defendants.
Matthew
Bowin recruited investors for his company, Interactive Products and
Services, in a direct public offering done entirely over the Internet. He
raised $190,000 from 150 investors. But instead of using the money to build the
company, Bowin pocketed the proceeds and bought groceries and stereo equipment.
The SEC sued Bowin in a civil case, and the Santa Cruz, CA District Attorney's
Office prosecuted him criminally. He was convicted of 54 felony counts and sentenced
to 10 years in jail.
VT
Systems solicited investments to finance the construction of an ethanol
plant in the Dominican Republic. The Internet solicitations promised a return
of 50% or more with no reasonable basis for the prediction. Their literature contained
lies about contracts with well known companies and omitted other important information
for investors. After the SEC filed a complaint, they agreed to stop breaking the
law.
Gene Block
and Renate Haag were caught offering "prime bank" securities,
a type of security that doesn't even exist. They collected over $3.5 million by
promising to double investors' money in four months. The SEC has frozen their
assets and stopped them from continuing their fraud.
Daniel
Odulo was stopped from soliciting investors for a proposed eel farm. Odulo
promised investors a "whopping 20% return," claiming that the investment
was "low risk." When he was caught by the SEC, he consented to the court
order stopping him from breaking the securities laws.
If you believe that you have been the victim of a securities-related
fraud, through the Internet or otherwise, or if you believe that
any person or entity may have violated or is currently violating
the federal securities laws, you can submit a complaint using
our online complaint
form or email us at enforcement@sec.gov.
http://www.sec.gov/investor/pubs/cyberfraud.htm Click
here to return to Article 16 | 
