Here is the Globe and Mail article link.http://www.theglobeandmail.com/docs/news/19970809/ROBFront/RINTE.html
Here is the article........check out the paragragh about 2/3rds down the page.
Hype artists spin stocks on the Web
CYBERFRAUD / The Internet has quickly become the tool
of choice for promoters with a hidden agenda who want to
manipulate markets. But regulators are starting to crack down.
Saturday, August 9, 1997
By Janet McFarland and Paul Waldie
The Globe and Mail
ACCOMPANYING STORYLINE ON B2
IT was dubbed "the radish" -- a gigantic, pink diamond pulled from the ground in the Buffalo Hills region of northern Alberta.
Its beauty was marred by just one flaw: The gem never existed. It was the product of the scheming imagination of an Internet
user who was feeding a buying frenzy for shares of Ashton Mining of Canada Inc.
The Vancouver-based company watched helplessly this May as its share price soared on the Toronto Stock Exchange from
$1.70 in late April to $7.65 by May 15, propelled by a stream of misinformation about its Alberta diamond exploration
project -- including suggestions the company had found the "radish" gem but was keeping it secret.
The information was posted to investment chat groups on the Internet. The hype died down in June and Ashton's share price
fell to $2.48. It now trades at about $4.
Ashton chief financial officer Alessandro Bitelli believes the shares were intentionally manipulated by investors trying to plant
rumours and cash in.
"We certainly saw the Internet as a perfect vehicle for somebody with a hidden agenda to manipulate the market," he says.
"The chat line per se, I think, is a useful tool for communicating information and exchanging ideas. It becomes extremely
dangerous when misinformation is used. And the type of comments we saw two months ago, I believe it was done on purpose
in order to create a market frenzy."
The Ashton case illustrates the enthusiasm with which promoters and hype artists have approached the new world of the
Internet. They have discovered the Internet can be better than the old methods of stock manipulation, such as conversations,
phone calls or mail-outs.
"I think the Internet is a wonderful tool because it's inexpensive, because it's easily accessed, because it provides massive
amounts of information to people at virtually no cost," says Mary Schapiro, president of Washington-based NASD Regulation
Inc., the self-regulatory organization for the brokerage industry in the United States. "And for those very same reasons, it is a
wonderful vehicle to perpetrate a fraud."
U.S. regulators have started to take action against Internet fraud, launching numerous prosecutions. They say it can be easy to
crack because there is a traceable written trail, even when it's supposedly anonymous.
In Canada, relatively few cases have been tackled by regulators. British Columbia has led the pack with a handful of
prosecutions and regulatory actions, while most other jurisdictions have just begun to turn their efforts toward cyberspace.
Most major regulatory bodies now have someone watching the Internet on a part-time basis.
That leaves U.S. regulators far ahead. South of the border, for example:
Regulators such as the Commodities Futures Trading Commission (CFTC) and the Securities Exchange Commission
(SEC) have teams of people who scan the Internet, looking for fraud;
Regulators use their World Wide Web sites to encourage investors to E-mail tips about on-line fraud. One regulator has
even posted a "most wanted" ad with a photo and biography of a securities fraud suspect;
The National Association of Securities Dealers (NASD) asked brokerage firms to send out its brochure warning investors
about the dangers of Internet securities manipulation, reaching an estimated 20 million account holders.
For U.S. regulators, chat group surveillance has become a routine part of their work. An informal survey by NASD Regulation
has revealed a close correlation between Internet postings and changes in both trading volume and stock price.
NASD is even developing a program to scan the Internet and post an alert when a company that is traded on the Nasdaq
Stock Market creates a Web site or is the subject of discussion in chat groups.
The actions by U.S. regulators have already resulted in several high-profile cases. Last year, California-based Comparator
Systems Corp. was delisted after the company's shares hit three consecutive trading volume records for the Nasdaq exchange
in May, prompting NASD Regulation to take a look at its Internet traffic.
NASD said Comparator was using an Internet chat group to hype its shares and its claim to have developed a new fingerprint
identification system. Among the postings on the chat group were enthusiastic messages such as: "Everyone who hasn't gotten
in on this stock, get in now. Don't miss the boat!"
Regulatory surveillance can also stem crime before it has a chance to start, says Geoffrey Aronow, director of enforcement at
the CFTC in Washington, which regulates commodities trading in the United States.
In one case last year, the CFTC cracked down on a promoter on the Internet a few weeks after his first posting. The
promoter, J. Spencer Brown, was soliciting clients to open an account that he would manage using a new computer program
for trading. CFTC officials discovered that Mr. Brown was not a registered broker and the trading system was improperly
advertised. The service was shut down before Mr. Brown had lined up any clients.
In Canada, regulators have done far less. Officials in British Columbia have been the most active but even there the activity
pales compared with U.S. regulators.
"We have somebody in our enforcement department who spends part [of his] time surfing the Web looking for problem sites,"
says Douglas Hyndman, chairman of the British Columbia Securities Commission. "The United States is probably a little further
ahead than us."
The BCSC has had some success in cracking down on Internet abuses. In May, the commission shut down Vancouver-based
Virgin Gold Inc., which was soliciting investors through a Web site even though the company president was not a registered
broker.
In another case, the BCSC will hold a hearing this month into allegations that American Technology Exploration Corp.
improperly used its Web site this spring to tout its gold property in Nevada, which it claimed contained 76 million ounces
worth $26.9-billion (U.S.). American Technology is incorporated in Nevada and has executive offices in Vancouver.
As for the Ontario Securities Commission, it had its first successful Internet case this summer when it closed an investment
advice site run by an individual from his home in Toronto. The OSC said Nazir Bayat, who ran a Web site called the Federal
Bureau of Investments, was offering investment advice without being registered with the OSC.
The commission has just one employee who scans the Internet on a part-time basis.
Ironically, the Vancouver Stock Exchange, which critics often accuse of having lax listing standards, has become one of the
most aggressive regulators of the Internet in Canada. The VSE holds listed companies responsible for anything said about their
business on the Net.
"We do have a policy concerning what is acceptable promotional activity," says Angela Huxham, director of surveillance at the
VSE. "If there is some promoter on the Internet making claims that could be breaches of the securities act or are just overly
promotional, we hold the company accountable."
In the last year, the VSE has ordered several companies to clarify comments made on the Net by either company officials or
investors in chat groups. The VSE also suspended trading in one company and delisted another in part because of
misinformation on their Web sites.
Officials at the Toronto Stock Exchange and Alberta Stock Exchange say they monitor the Internet as part of their routine
surveillance but so far they haven't developed a program as concerted as the VSE.
Canada's self-regulatory organization for the brokerage industry has not begun any work on Internet fraud cases. Larry Boyce,
director of sales, compliance and registration for the Investment Dealers Association of Canada (IDA), says issues about the
Internet are being studied by a committee.
Toronto lawyer Fraser Mann, whose firm Borden & Elliot has formed a group specializing in legal issues related to the
Internet, says Canadian regulators have to catch up.
Canadian regulators "haven't moved terribly quickly, and I don't mean to be critical because of that. But I think they will be
forced to move pretty soon and certainly follow what's taking place in the United States," he said.
The slow start doesn't mean there is less hype to watch in Canada. Perhaps the most flagrant example of promotional excess
on the Net involved Bre-X Minerals Ltd. of Calgary. Last spring, as Bre-X was in the midst of an investigation that later
proved its massive Indonesian gold find was a fraud, the Internet was loaded with rumours that moved the company's share
price almost daily.
The Internet is also full of investment tips even though, in general, only registered brokers can offer advice on buying or selling
shares.
One active adviser is Frank Keszthelyi of Toronto, who runs the Penny Stock Guru, an investment service for members who
make one-time "donations" of up to $150 (Canadian). Mr. Keszthelyi declined to be interviewed for this story, but according
to information he provided on the Net, he has been a broker for 11 years.
Last September, the Penny Stock Guru used a chat group to tout shares in Chandeleur Bay Production Co. Ltd., a
Vancouver-based energy company that was trading on the VSE at about 35 cents a share at the time.
"Buy as much as you can," he said in a posting on Sept. 30. "Among buyers is a group out of Hong Kong worth œ30-billion
[$64-billion Canadian] and the owner of the largest private bank in Switzerland."
On Oct. 1, he said that Chandeleur had "a very powerful promoter with international contacts . . . He just took three stocks
from pennies to over $3 in the last three months. This is a stock you'll be telling your grandkids about."
Trading in Chandeleur's shares took off and the stock price, at 33 cents on Sept. 10, hit 79 cents Sept. 27. However, by Oct.
9, the hype died down and the shares fell to 40 cents. The company's stock was later temporarily suspended after the VSE
discovered problems in trading by company officials. Chandeleur currently trades around 35 cents.
Ironically, while Internet users can post messages anonymously, regulators say the Net is one of the easier places to catch
fraud.
Not only do Internet postings remain on-line as a permanent record, but the people behind the names used on the Net can
often be discovered if regulators subpoena records from Internet access providers.
One of the most popular investment chat sites, California-based Silicon Investor, has provided the names of several members
to the SEC for a current investigation about a chat site.
Martin Eady, manager of investigations, compliance and enforcement for the BCSC, said the commission hasn't yet requested
information from an access provider but it likely wouldn't be hard to obtain.
"Our commission could get" the information, says Mr. Eady, who is on a committee of North American regulators studying
co-ordination of Internet surveillance. "I know that, routinely, we do get information from the phone company. It's certainly
true that on the Internet, people leave a trail."
Adrian du Plessis, a Vancouver-based private investigator who specializes in securities issues, says the Internet should make
life easier for regulators because of the record it leaves.
"As an investigator, I've never found it so easy to find out what's going on in the market," he said.
"It used to be all these games were played by the brokers and the promoters and then when it all collapsed, they'd go 'Gee, I
don't know where it came from.' With the Internet, all this stuff has an audit trail recorded somewhere, so there is no such thing
as an unsourceable rumour."
Mr. du Plessis says the Internet should be given credit for self-regulation. In popular chat groups, he says, invariably someone
will dig out the facts if a stock is being hyped.
Indeed, Randy Befumo, senior analyst at the Motley Fool based in Alexandria, Va., an investment chat site, says he has
noticed growing skepticism from users of on-line investment groups. He says the height of hype and naive acceptance came in
spring last year, when many share prices seemed to be soaring in part because of Internet chat.
"I think people are a lot less likely to go off and buy whatever they happen to see on-line now," he adds.
The Motley Fool site does not allow chat groups for stocks that trade under $5 (U.S.), Mr. Befumo says, because they are
too often manipulated.
There is nascent support in Canada for a suggestion that brokers should not be allowed to post anonymously on investment
chat groups, because of the potential for manipulation. Mr. Boyce at the IDA, which regulates brokers, says the idea is sound,
even if it would be difficult to police.
"What is possible to do is put in rules that at least bring to the attention of the members of the industry how they're expected to
behave," he says.
But the greatest threat of fraud often comes from an insider in a company with many shares and options to cash in.
As a result, the seamy side of the investor relations profession has embraced the Internet as the ideal new vehicle for
promotion.
In some cases, companies hire hype artists to join on-line chat groups posing as anonymous enthusiasts, planting positive
rumours and spinning information.
"Based on our experience, companies are always aware [of promotional activity by others] and they are always sort of behind
this sort of stuff," the VSE's Ms. Huxham says. "People don't do this out of the goodness of their heart. Typically, they get
something under the table. There is a reason why they are promoting certain companies."
This year, the VSE forbade its listed companies from dealing with Florida promoter George Chelekis, who has written
extensively on Canadian penny stocks in his newsletter Web site.
The VSE's announcement came after the SEC discovered Mr. Chelekis and two companies he owns had accepted at least
$1.1-million from 150 companies, as well as 275,000 shares in 10 companies, in return for recommending their stock on his
Web site. He consented to a $162,727 fine without admitting or denying the allegations.
Richard Wertheim, an investor relations consultant in Toronto, says most investor relations firms aren't paid to simply hype
stocks on the Net, but some do use it for promotion. He said many junior mining companies, in particular, hire investor
relations people to market their securities.
"In the past, that meant anything from calling people up to sending out materials or holding meetings," he says. "Now, the Net
is just another means of communications."
Mr. Wertheim says it's impractical to require companies to respond to every rumour on the Net.
Ashton Mining's Mr. Bitelli agrees and says his company has decided not to respond publicly to on-line rumours.
"One could always accuse the company of having selectively addressed certain rumours or certain misinformation [on the
Internet] as opposed to all of it. You never know when to stop."
Whether companies respond or not, regulators say investors still listen to on-line claims. There is such enthusiasm for the
technology that many investors are only slowly becoming jaded to its potential for abuse.
"People seem to think there's some kind of extra credibility to something they're reading on their computer screen," NASD's
Ms. Schapiro says.
"If they were hearing it over the telephone, or someone was telling them in person, they might not fall for it. But there's a sense
out there that my fellow Web travellers would never mislead me."
Mr. Bitelli concurs.
"It seems to me like people believe it more because it's on the Internet. But it's really nothing more than a means of
communication." |
