(market psych/art) Don't Get Burned by Message Boards
by Eric C. Fleming
Stocks Reporter
cnbc.com
Online message boards and chat rooms have become the basic tools of many a neophyte investor. Yet, just like the "boiler rooms" in the brick-and-mortar investing world, charlatans galore can be found on the Web.
"There's been a migration of fraudulent behavior onto the Web because it's faster, easier and cheaper than a boiler room," says Securities and Exchange Commission spokesman Chris Ulman.
A boiler room, also known as a "bucket shop," is a term for a room or office where a team of stockbrokers work the phones pushing shaky investments onto unsuspecting investors.
Boiler rooms got their name because they can be set up anywhere and can then easily shut down when authorities get wise. While the tactics used at bucket shops aren't always illegal, they tend to violate the NASD's rules of fair practice.
With the advent of the Internet, fewer resources are needed to set up online boiler rooms. A few e-mail accounts and less than a handful of folks with loose morals can be enough to engage in fraud on the Web.
For example, federal authorities recently arrested three California men for fraud. The trio used posts on hundreds of message boards to push a stock that usually trades below 20 cents, NEI WebWorld Inc. {NEIP}, to above $15 for three days through false rumors spread on message boards from bogus e-mail addresses.
Online scams have become pervasive enough to grab the SEC's attention. The securities watchdog formed a division dedicated exclusively to the Web more than a year ago.
There are a lot of eyes out there scanning for the less-than-ethical among us. The SEC has a "cyber force" of 10 staffers who train another 250 lawyers how to spot fraud online.
The cyber force members also check out complaints they receive. If they find wrongdoing, they can go after the ne'er-do-well with civil litigation and can alert other agencies, such as the Federal Bureau of Investigation, to seek criminal prosecution. The SEC can be reached at enforcement@sec.gov or 800-SEC-0330, or through its Web site (www.sec.gov).
Message boards are notes written onto electronic bulletin boards that are archived and can be searched. Chat rooms post short messages from different users onto a scrolling screen that aren't saved.
A thread is a topic that is being discussed on a board. These bulletin boards can be used to break the law by illegally touting a stock or engaging in fraud.
Because of flippantly cute television commercials and the ease of online trading, many investors have come to believe that nearly anyone can make a mint playing the market -- and there are people waiting to prey on that greed.
Buying stocks is just like buying a toaster or microwave oven: It is an investment that you hope to reap benefits from over time. Before making other big purchases, most people shop around, read Consumer Reports and then look for a good price. Yet, some throw caution to the wind when it comes to stocks, which can become a really painful lesson.
A recent fabrication was a well-meaning April Fool's joke -- meant to be teach a lesson about investing intelligently.
Fly By Night Associates, a group of friends that met online, put out a press release earlier this year for a phony company called webnode.com. The release touted a $4 billion contract with the U.S. government using the company's fiber-optic Web "node" technology.
"Every year we try to poke fun of a hot topic, and we try to do it in in a humorous sort to way to show how easy it is to get conned when you don't do due diligence," says Jeff Mitchell, an FBN member.
Message boards, such as Silicon Investor's, filled with chatter about the bogus webnode, the contract and the technology that didn't exist. On April 1, FBN got more than 1,500 inquiries about investing in webnode.
Even after FBN admitted it was a hoax, there was still boards questioning the veracity of webnode. Some even claimed that they had friends in the company's IT staff who had told them that these nodes were oversubscribed.
"If selling the Internet brick by brick, like the Brooklyn Bridge, doesn't sound patently absurd, then there's nothing that can be done," says Mitchell, who runs a software-development company in Westport, Conn.
Besides cleverly concocted and well intentioned ruses, there are plenty of grifters looking to play off investors' na‹vet‚ in the nearly anonymous world of message boards and chat rooms that dot the Internet's landscape.
One team of brokers in California, for instance, falsely represented former U.S. Surgeon General C. Everett Koop and television journalist Tom Brokaw as being affiliated with Defendant Medical Advantage Inc. The group then offered and sold unregistered securities over the phone and through Web sites, bilking those hoodwinked by the bogus news.
A common strategy is the "pump and dump." An investor will load up on a stock then tout it on boards and elsewhere to stir up demand then sell as the stock rises.
Another group in New York loaded up on blocks of micro-cap stocks, then touted them on the StockPlayer newsletter, which was distributed via e-mail to subscribers. As subscribers bought, the group sold, and the group profited in the millions.
Other less-scrupulous individuals make up rumors of an acquisition, merger, new technology or big contract to bump up the share price.
"When you're making up the facts, that's fraud," says Richard Phillips, a attorney at Washington-based Kirkpatrick & Lockhart, who specializes in securities law.
Another illegal activity is floating a rumor that is designed to hurt a stock's value. Traders with short positions would be interested in this scheme. Also, disgruntled employees or former workers could be culprits, interested in a bit of payback.
In either case, there are both state and federal laws that protect the individual and companies alike from libel, slander and other harmful barbs, says Alan Fisch, an intellectual-property attorney at Washington-based Howrey & Simon.
While it's true that these laws don't specifically address Web-related wrongdoing, they do deal across a variety of media: mail, phone or Web; it doesn't matter.
The companies that provide the boards also police the posts for trouble makers. Silicon Investor, Go2Net Inc.'s {GNET} subscription-based board and chat service, requires its members to disclose where they work or other potential conflicts of interest.
To battle the promoters and spammers, the Silicon Investor doesn't allow multiple screen names and has software that screens the same post that is spammed across different boards or ads that appear more than 10 times. The subscribers are also required to stay on the thread's topic.
Besides the software, Silicon Investor has warm bodies surfing its boards, which get about 20,000 posts a day, as well as responding to member complaints.
But even with the Feds watching and the board companies policing the posting, the scammers can still get through. Besides, boards are just one source of information.
"People should always do their own homework, not make decisions based on a thread," says Mark Peterson, a spokesman for Silicon Investor.
How to Avoid Getting Taken:
**Get educated. Find out what scams have been tried before and report to the SEC when you think someone is trying to pull a fast one. The SEC announces its actions against illegal touting and other fraud on its Web site.
**Don't pass out information unless you know it's true. You may have good intentions, but it's still a no-no. Spreading unfounded rumors could attract the interest of the Feds. If you can't back up information or aren't allowed to disclose it, keep it to yourself. Making up rumors carries even stiffer penalties.
**Know who you are talking to. Most postings have screen names and readers don't know the person who has written there. SEC chairman Arthur Levitt has said that message boards are the near equivalent of graffiti: Anyone can write on them and you don't know who did.
Remember that the person who tapped in that "X stock is amazing" could be being paid to tout a stock and not disclosing their compensation. Also, they could hold a position in the stock and are looking to artificially inflate its value. And the crowd you think you're chatting with could be a party of one. Many chat rooms, such as Raging Bull, allow for multiple aliases with the simple flubbing of a name and address.
Do business with people you trust. If you've never heard of the brokerage on a Web site or over the phone, you could be talking to a boiler room.
There's no such thing as "free" stock. All companies issuing stock have to register with either the state or the federal authorities to sell or give away stock. It's the givers that end up winning with their generosity. You may think you are getting a great deal, but the company is garnering market data and Internet traffic by luring unsuspecting bargain hunters to their site.
Take a really close look into companies that trade with very thin floats or that trade over the counter. It's easy to buy a significant portion of these companies and push the shares from pennies into the stratosphere on a rumor or bit of bogus news. The people who win tend to be the ones doing the pushing and get out while others pile in.
There's no such thing as "no risk." Any one who promises a deal with little or no risk is likely breaking the law. Just as ridiculous is the promise of a certain percentage return. An easy rule of thumb is that the more risky an investment, the greater the chance the deal will blow up.
A positive side of bringing stock fraud to the Web is that it can be easily traceable. All e-mail leaves a trail. Also, the identities of posters can be gleaned through legal action against the board provider. All this can give the powers that be the electronic trail to track down the scam artists. |
