Internet Fraud Complaints on the Rise
BY ELLEN L. ROSEN
New York Law Journal
Thursday, February 10, 2000
'Investors rule" is becoming a reality at the Securities and Exchange
Commission, which has long styled itself the champion of investors'
rights.
In the same weekend that the St. Louis Rams bested the Tennessee
Titans in a down-to-the-wire Super Bowl, the SEC received more than
1,000 e-mails - a record number - from individual investors pointing
out a wide range of putative Internet frauds.
John Reed Stark, head of the agency's Internet enforcement
efforts, was surprised by the recent flood of complaints, but was
quick to respond to them.
The 35-year-old lawyer, who had the foresight to stake out Internet
fraud as an area for enforcement five years ago, does not yet know if
the levels reflect merely a blip from snowbound investors or a sign of
communications to come. While those contacting the SEC will receive
only automated responses, Mr. Stark said that each investor
complaint will be evaluated for possible action by the SEC or
another federal agency. (Complaints to the SEC may be sent to
enforcement@sec.gov.)
Mr. Stark, of course, does not depend solely on investors to find
Internet crime. He said that the agency has a force of approximately
200 lawyers, accountants and analysts who devote some time
each week to searching the Web for fraud. The agency is looking
at 11 categories of fraud, although he declined to describe them for
fear that any definition of the agency's efforts could hamper
enforcement.
Hundreds of Web sites are on the agency's watch list, many for market
manipulation of microcap stocks. The agency is also looking at
"cybersmearing" - the attempt to spread damaging information
about a company on the Internet. While no cases have yet been
filed, Mr. Stark does not rule out agency action in the area.
What, then, should a company do if it is victimized by a
cybersmear?
John R. Hewitt, counsel in the New York office of Chicago's Mayer,
Brown & Platt, said companies that already have current Web sites may
choose to do nothing, rather than "dignify" isolated comments. The
last
thing that companies should do is attempt to "slug it out" with
those posting the comments.
If, however, a company is publicly traded, there may be a duty to
respond via a press release and through a corporate Web site when
the stock price is affected.
Mr. Hewitt advised against cease-and-desist letters, but said that if
there is a viable cause of action, litigation should be filed as
soon as possible.
Although messages often are anonymous, it is possible to
secure information about the offender from Internet service
providers by subpoena.
And there is one more action companies should take, said the
SEC's Mr. Stark: "Report it to us."
Increased investor involvement has not been limited to ferreting out
fraud. More than 400 investors have contacted the SEC on another
matter: the rules proposed in December to ban the selective disclosure
of company information to analysts before such information is given to
the public at large.
In the plain - and sometimes colorful - English that the SEC has
required of recent public filings, investors are telling the agency
that
they support efforts to require full information. Bonnie Stroud, of
Minot,
N.D., for example, praised the agency in this way: "You go, SEC."
Such colloquial language is, of course, a far cry from the lawyerly
missives sent to the agency when it sought public comment on its
complicated and densely written rules to overhaul the capital markets
that became known as the "Aircraft Carrier" proposals.
And views of counsel are still to come on the disclosure proposal,
which
has two months left in its 90-day comment period. But the volume may
strengthen the agency's resolve in pushing through its reforms. |
