Stock fraud increasing online
By Juliette Fairley, Special for USA TODAY
When Christopher Hollinger visited the message boards at Yahoo! Finance in April 1998, he found postings touting a hot new stock.
Eager to make some quick money, the New York senior financial analyst bought 400 shares at $4 a share.
Soon after he bought his shares, the price started to drop. It went to $1.50 a share by October. ''At this point, I'm thinking, there's got to be some way to get out without losing my shirt,'' says Hollinger, 29.
Hollinger got lucky. He held on for seven months, until the stock price went back to $5.25, then sold, making a $500 profit.
Hollinger believes he was the victim of an investing scheme called pump and dump, in which people spread false or misleading information about a stock they own to inflate the price. If the stock goes up, they sell, sending the price plunging and leaving those who aren't in on the scheme holding shares they bought at inflated prices.
As the number of people trading stocks online increases, so has fraud. Forrester Research projects the number of people investing online will reach 2.4 million by 2003, up from an estimated 900,000 last year.
Con artists have moved to the Internet as more Americans get connected, says Norman Willox, CEO of the National Fraud Center, a Horsham, Pa., company that helps government and industries fight financial fraud.
The Securities and Exchange Commission has brought more than 115 fraud cases since the Internet enforcement program started in 1995, program chief John Stark says.
When the Enforcement Complaint Center opened in 1996, he says, it got three or four e-mails a day. Today, it gets 300 to 400.
''The Internet has created new opportunities for scam artists,'' Stark says. ''We've brought cases involving everything from eel farms and coconut plantations to sophisticated foreign currency trading schemes.''
People looking for quick money are easy targets, says James Walsh, author of You Can't Cheat An Honest Man (Silver Lake Publishing, 1999). Con artists are counting on Internet investors' greed and lack of sophistication, Walsh says.
But you don't have to go looking for an investment opportunity to come across a scam. Just by being online you increase your chances of being a fraud target, says Bill McDonald, enforcement director of the California Department of Corporations, that state's securities regulator. ''If you have an investment you want to sell, you have to aggressively market it, and the way you market it is through bulletin boards, through chat rooms, through spam (unsolicited e-mail) and through targeted advertising,'' he says.
Besides that, how can you avoid getting scammed on the Internet? Tanya Solov, director of the Illinois Securities Department in Chicago, says: Don't believe everything you see. ''People believe it because it's over the Internet, whereas if they get an offer in the mail and it's a general mailing, they might throw it into the garbage,'' she says.
The SEC's Stark advises doing plenty of homework before investing. ''You should talk to people you trust who understand investments and ask them. You could check your state (securities) regulator to make sure there have been no actions against this company. People just need to put a lot of time in, pouring over everything about the company.''
One red flag of a pump-and-dump scheme is a stock's trading volume, says Carrie Coghill, a financial planner at D.B. Root in Pittsburgh.
''If you see that the stock is trading up on high volume, you have to question what will happen when that volume or that demand goes away,'' Coghill says.
If you hang out in chat rooms, Willox says, ''You need to be very, very cautious about where you go and who you talk to and what information you give about yourself.''
Phrases such as ''It's a sure winner'' used to be a tip-off that you were looking at a scam. But Willox says scams are more sophisticated now.
''Instead of saying, 'I am going to double your money in six months' or 'I'm going to give you a 50% return on your investment,' they are bringing them down to where you will earn 10%, 11%, 12%, which makes them more credible,'' he says. |
