To catch a cyber thief Regulators get creative to fight flourishing stock cons
02/16/99- Updated 11:31 PM ET
The Nation's Homepage
By Tom Lowry, USA TODAY
NEW YORK - Want to make a killing? The Internet can get you in on shares of a time machine or a mile-long floating condominium or a Brazilian diamond mine.
Trouble is the person behind the tout might be anyone from a teen-ager to an offshore swindler.
Disreputable stock promoters who once plied their trade through telephone cold calls and radio and newspaper ads are seizing on the speed and anonymity of the Internet to con investors.
State and federal regulators, in turn, are resorting to new surveillance methods to snare Net scams, which often are run out of the high-tech equivalent of boiler rooms. Among them: tapping scientists at Los Alamos National Laboratory, birthplace of the nuclear bomb.
With more investors flocking to the Internet, authorities fear a growing pool of potential victims is at risk. At the same time, regulators are feeling their way through this relatively new area of fraud, which is allowing fast-moving con artists to take advantage of the borderless, clandestine world of cyberspace.
"If you're a con artist and you are not on the Internet, you should be sued for malpractice because it is so cheap and easy to reach out and touch millions of people," says Marc Beauchamp of the North American Securities Administrators Association, a group of state and Canadian province securities regulators.
The Securities and Exchange Commission says it receives up to 300 complaints a day from investors about alleged Internet fraud. In a nationwide sweep in October - the biggest action of its kind - the SEC filed 23 enforcement actions against 44 people for illegally promoting stocks over the Internet.
Whether on financial Web sites, investor bulletin boards or in chat rooms, online information about investments is abundant. The sheer volume of stock touts on the Internet is confounding regulators.
"It's an absolute nightmare," says Bill McDonald, enforcement chief for the California Department of Corporations. "The rumor-mongering is rampant, and that's creating enormous opportunities for fraud in both talking up and talking down stocks."
Regulators say promoters will even use chat rooms to create a phony conversation between two investors to generate interest in a stock. Promoters also use spamming, an electronic version of mass mailing in which certain groups, particularly the elderly, can be targeted.
Such activities can be illegal and cost investors millions if promoters tout companies that don't have products or put out false or misleading information to manipulate the price of a company's stock. Often, the manipulations take the form of "pump and dump" schemes in which con artists artificially inflate the price of a stock and then sell it at its peak. The con artists walk away with the profits and investors are left with a stock that plunges once the hype stops.
California recently ordered 10 companies and 15 people to stop offering investment opportunities over the Internet. Regulators came across the pitches while doing routine surveillance. Among them:
Freedom Opportunities in Kansas offered time sharing in a mile-long floating condominium complex.
A British company, Time Machines, sold investments in a time machine. The firm claimed it would either develop a machine itself or become so well known that a traveler from the future would come back in time and give it the technology to develop the time machine.
California is among a half-dozen states so concerned about Internet fraud potential that their securities regulators are working with Los Alamos scientists to find ways to track con artists in cyberspace. The scientists begin fraud investigations by looking for language such as "guaranteed profits," "get rich quick" and "government approved," technical analyst Vic Hogsett says. "At this point, we are trying to characterize the problem and what sorts of patterns are indicative of stock fraud," Hogsett says. "Regulators are being overwhelmed by the sheer volume of this. We have an ability here to analyze complex issues."
Los Alamos also is working with the federal government to develop computer models that detect Medicare and tax fraud.
Muzzling fraud
Popular investor Web sites also are taking measures to limit fraudulent stock touts.
Silicon Investor, which puts up 15,000 new postings a day, employs four people to scan its site for potentially bogus promotions. Silicon Investor is able to detect identical messages, such as a spammer would send. The site's employees then question the sender, says John Keister, president of Go2Net, which owns Silicon Investor.
Keister also says the site doesn't attract the usual array of con artists because it charges a one-time $200 subscription fee and keeps records of all online aliases used on the site.
Yahoo no longer creates bulletin boards for over-the-counter stocks, which are so small they aren't required to file records with the SEC and often are the targets of unscrupulous promoters.
PR Newswire, which distributes business press releases, said last fall it will not allow companies to mention more well-known firms in their releases unless they have a deal with those firms. Promoters were peppering press releases with names like Microsoft and Amazon.com, knowing those names would be picked up by search engines and give the press releases broader distribution.
Besides widely distributing con artists' scams, the Internet also lets them quickly resume their activities after being shut down - sometimes putting up a new Web site the same day, regulators say. Previously, promoters often needed six months to re-establish their operations, usually in a different part of the country.
The SEC has even shut down stock tout Web pages operated by teen-agers. Investors were unaware their stock tips were coming from high school students. SEC officials declined to discuss specifics, citing the ages of the would-be promoters.
Regulators also say they are seeing more Internet stock touts coming from outside the USA, which greatly restricts their ability to track and file charges against con artists.
The SEC has increased efforts to shut down stock promoters touting bogus investments on the Internet, bringing 62 Internet fraud actions since late 1995.
Cyber boiler rooms
"What we are seeing is new cyber boiler rooms," says John Reed Stark, chief of the SEC's Office of Internet Enforcement. Stark says even though the Internet fraudsters "want to hide from you, at some point, they have to collect the money and market themselves." That is how the SEC has been able to track them, he says.
Earlier this month, the SEC filed civil fraud charges against a Dallas company and its president for allegedly using the Internet to mislead investors about a foreign currency investment. Investors may have lost $2 million, the SEC says.
The foreign currency firm, Forex Asset Management, and its president, Jason Kosova, raised at least $4 million from at least 40 investors. The firm used the Internet, as well as radio infomercials, cold calls and hotel seminars, the SEC says. On Forex's Web site, Kosova told investors they could virtually eliminate risk by investing in foreign currencies. He also said his firm was a full-service brokerage; the SEC says it was not.
Only $600,000 of the money collected by Forex was invested. At least $2 million is unaccounted for, the SEC says. Kosova owns a 37-foot Thunderbird racing boat, a Porsche and a stake in a trendy Dallas sushi restaurant, the SEC says. About $1 million was frozen by regulators.
Kosova's lawyer, David Reed of Dallas, declined to comment.
Among those sued in the SEC's October sweep were stock promoters Brian Volmer and John Switzer. They were charged with putting misleading information on the Web site Investor's Edge about Cetacean Industries, which purportedly mined diamonds in Brazil. The company had offered Volmer and Switzer stock and cash in exchange for favorable promotions, an arrangement Volmer and Switzer did not disclose to investors, the SEC says.
The case illustrates the migration of illegal stock touting from print advertising to the Internet, the SEC says. Volmer and Switzer previously had pushed the stock in newspapers.
Volmer and Switzer's lawyer, C. Timothy Smoot of Los Angeles, says there was "never any intent on the part of my clients to mislead anybody about any stock."
Meanwhile, regulators fear that because investors can see a promotion on the Internet and click on it, they might think it is more legitimate than a tip coming from a promoter over the telephone.
"Our concern is that some people are naive enough to invest based on junk e-mail and anonymous bulletin board tips," says Beauchamp of the securities regulators' group. |
