The New Untouchables
On the beat with the SEC's Internet fraud squad.
From the January 09, 2001 issue
business2.com
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Edward Robinson
View the "DRAG NET" Xplanation
From left are Mark Wharton (The Brit); Carolyn Kurr (The Finance Expert); Matthew Moro (The Deputy); John Reed Stark (The Chief); and David Herman (The Utility Man).
Photography: Laura Kleinhenz
As the chief of the Securities and Exchange Commission's Internet fraud squad, John Reed Stark was used to seeing stocks do funny things, but nothing like this: On Monday morning, November 15, 1999, he got a call from his friend and colleague, Cam Funkhouser, a top official at the National Association of Securities Dealers' regulation unit, who urged him to check out a stock for a Texas company called NEI Webworld. Stark clicked onto the Net and was amazed: The preceding Friday, NEI had been trading at 13 cents per share but was opening that Monday at $8 a share. It would later rocket to $15–a gain of more than 11,000 percent.
Not a bad return, especially considering that NEI had declared bankruptcy 12 months earlier.
Over the next three days Stark and his team of investigators laid an electronic dragnet around the stock and eventually tracked the trades to three people, including a pair of former students of the University of California at Los Angeles. They had manipulated NEI's lifeless security by sending hundreds of spams to message boards on Yahoo!, Raging Bull, and other investing sites claiming that NEI was about to be acquired in a reverse merger by a private, San Jose, Calif., firm called LGC Wireless.
The claim was a complete fabrication, of course, but it worked: The culprits pocketed more than $360,000 in profits. They didn't have much time to savor their success: A few weeks later the SEC obtained a court order to freeze their assets, and the FBI arrested the two worst offenders. It was one of the first major cases Stark's unit broke open that involved message-board spam–a favored MO of online stock swindlers.
While it's no secret that the Net's reach and get-rich-quick ethos has presented stock swindlers with a mammoth opportunity to perpetrate scams like these, what is far less known is exactly how the Feds have mobilized to fight them. The SEC's Internet fraud squad, started by one man with an idea and an America Online account, made almost 100 cases last year–up from five just four years ago.
Keeping up with the workload hasn't been easy. The explosion of online trading–three out of every 10 trades are now executed online, estimates Chase H&Q–and the oceans of investing information on the Web have made fighting online fraud akin to mounting an attack on bad weather. Stark's office receives about 400 complaints on a typical day. "With more investing in individual stocks than funds, more day trading, and more buying on impulse than sophisticated analysis, fraud has increased exponentially," says Lawrence Ponemon of PricewaterhouseCoopers, who heads a division that consults on fraud matters. Even organized crime is getting in on the action (see "The Shareholder From Hell ," p72). |
