To Lalit Jain,
Great read posted by Dan Smith.
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."
HARLEY.
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