“The Net has become the new wild wild West…years ago those of us online were bombarded with ‘spam’ or junk e-mail for X-rated Web sites. . . now it seems like the X has morphed into a dollar sign.”— Peter Hildreth, president of the North American Securities Administrators Association
Every year the Securities and Exchange Commission files Internet fraud charges against companies. As recently as February 1, 2011, the SEC filed fraud charges against the operators of a $33 million international microcap stock scheme involving the stocks of eight small U.S. companies headquartered in the People’s Republic of China, Canada, and Israel. In a complaint filed in U.S. District Court for the Eastern District of Michigan, the SEC charged three companies and eight individuals with engaging in unlawful spam e-mail campaigns to pump and dump securities of microcap companies.
SEC Director of Enforcement Richard H. Walker said, “In all of these cases, the Internet promoters gave ostensibly independent opinions about microcap companies that in reality were bought and paid for. Not only did they lie about their own independence, some of them lied about the companies they featured, then took advantage of any quick spike in price to sell their shares for a fast and easy profit. (This) sweep demonstrates the SEC’s commitment to cleaning up the Internet, by aggressively prosecuting securities violations occurring in cyberspace.”
WHERE THE FRAUDS ARE
Online Investment Newsletter–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 for high profits.
Bulletin Boards–Online bulletin boards —whether newsgroups, usenet, or webbased 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.
INVEST WISELY ON THE INTERNET
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.
The SEC gives advice–How do you protect yourself from online fraudsters? The SEC says “investigate before you invest,” and offers the following 10 guidelines:
1. Download and print a hard copy of any online solicitation that you are considering. Make sure you catch the Internet address (VRL) and note the date and time that you saw the offer. Save this in case you need it later.
2. Don’t assume that people on line are who they claim they are. The investment that sounds so good may be a figment of their imagination, or they may be paid to promote it.
3. Ask the on-line promoter whether — and how much — they’ve been paid to tout the opportunity.
4. Ask the online promoter where the company is incorporated. Call that state’s secretary of state and ask if the company is incorporated with them and has a current annual report on file. Also, check the SEC’s EDGAR database.
5. Don’t believe everything you read online. Take the time to investigate a possible investment opportunity before you hand over your hard-earned money.
6. Check with your state securities regulator or the SEC and ask if they have received any complaints about the company, its managers, or the promoter.
7. Ask for other sources of information at your local public library. For example, there are resources that provide information about the company, such as a payment analysis, credit report, lawsuits, liens, or judgments.
8. Before you invest, always obtain written financial information, such as a prospectus, annual report, offering circular, and financial statements. Compare the written information to what you’ve read online and watch out if you’re told that no information is available.
9. Don’t assume that your access provider or online service has approved or even screened the investment. Anyone can set up a web site or advertise online, often without any check of its legitimacy or truthfulness.
10. You can gain valuable input and advise by checking with a trusted financial advisor, your broker or attorney concerning any investment you learn about online.
BE ALERT FOR TELLTALE SIGNS OF ONLINE FRAUD
• Be wary of promises of quick profits, offers to share “inside” information, and pressure to invest before you have an opportunity to investigate.
• Be careful of promoters who use “aliases.” Pseudonyms are common online, and some salespeople will to try to hide their true identity. Look for other promotions by the same person.
• Words like “guarantee,” “high return,” “limited offer,” or “as safe as a C.D.” may be a red flag. No financial investment is “risk free” and a high rate of return means greater risk.
• Watch out for offshore scams and investment opportunities in other countries. When you send your money abroad, and something goes wrong, it’s more difficult to find out what happened and to locate your money.
• If a company is not registered or has not filed a “Form D” with the SEC, call your state securities regulator.
• Remember, if it sounds too good to be true, it probably is.
