Re: The Web may be new, but the scam is old
The Web may be new, but the scam is old
Jeff Brown
Personal Finance
The most frightening thing about the stock fraud committed by two California twentysomethings is that it was so easy. It only took a couple of dishonest guys with computers and an Internet connection.
Way back in time, in the 1980s or early '90s, for instance, it took an organizational whiz to engineer a classic "pump and dump" scam.
Remember the cases the Securities and Exchange Commission brought against First Jersey Securities and other firms that succeeded it? Here's how those scams worked:
First, a brokerage would buy up the shares of an inactive publicly traded company with a worthless stock. Then that company would be merged with a nearly worthless privately held company with an exciting-sounding business, such as finding a cancer cure.
This provided the public company with a "story" that the brokerage's sales force could use to peddle the stock among unsophisticated investors. The brokerage could push up the price listed on the exchange by making small purchase offers at inflated prices. Investors would see the rising price and rush to buy. Once the sales force had finished selling all of the shares, the price would tumble. Often, the crooked brokerage would then buy the shares back and pump and dump again.
All this took an organization with hundreds of people, and it could take millions of dollars to set the operation up.
Now, consider the case against Aras Aziz-Golshani, 23, of Beverly Hills, Calif., and Hootan Melamed, 24, of Pomona, Calif. Last week, the SEC announced the men had pleaded guilty to felony charges of securities fraud related to trading last November of shares of NEI Webworld Inc., a bankrupt Dallas printing company.
Compared with the old First Jersey scams, theirs was simple. They bought up NEI shares for around 13 cents each on Friday, Nov. 12,; then, over the following weekend, they plastered Internet bulletin boards with messages saying NEI was a takeover target.
On Monday, the price soared as high as $15 a share, and the men sold at a profit of $364,000. A half-hour later, the shares fell to 25 cents; today, they are worthless. The men could receive prison terms and heavy fines, but have yet to be sentenced. On Thursday, the SEC filed new charges against the two involving trades in 11 other stocks.
The NEI scam was so simple, so easy. So much so that any Web-savvy scamster could do it. These guys didn't even need their own computers; they used machines at UCLA. There was no team of brokers or back office full of clerks to keep records. They just thought of the scam and did it.
Authorities bragged that the case shows this kind of crook can be caught, but don't count on that discouraging others. Crooks of all types get caught, yet others get into the business. And a victim is a victim, even if the bad guy goes to jail.
Although the Internet has modernized stock scams, a key element of the NEI case is the same as in the old First Jersey days: gullible and greedy investors.
Years ago, I interviewed dozens of stock-scam victims and found that many, having been burned once, went on to be burned again and again. People hate to think they're dumb and tend to believe crooked brokers' excuses about bad luck, or their assurances that things will turn around.
And crooks know that a big lie is better than a small one. Don't promise profits of 25 percent; promise 250 percent, or 2,500.
There is indeed a lot of good investment information on the Internet, from SEC filings to stock-price histories, news and fundamental data.
But "inside" investment tips from people you don't know are worth what you pay for them - nothing.
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