More from WSJ-Cyber Investing. Seems these guys just can't get enough of this stuff.....
SEC's 'Cyberforce' Scours Net
To Combat Investment Scams
By NANCY BOYD KENNEDY
Special to THE WALL STREET JOURNAL INTERACTIVE EDITION
Back in the days of Netscape 1.0, when the nascent
Internet community had barely formed, a fellow named
Daniel Odulo solicited subscribers to several investing
newsgroups offering bonds for sale to raise money for
his company, Golden Waters.
At the time, he promised 20% returns -- far more
than bonds generally return -- and insurance
against losses. But according to the Securities and Exchange Commission, Mr. Odulo's sweetheart deal turned out to be a heartbreaker.
The SEC filed a complaint against Mr. Odulo in August
1995 for failing to mention what his company intended
to do with the money, which was to buy and raise eels,
an enterprise in which Mr. Odulo had no experience.
Additionally, the SEC claimed, investment advisers who
vouched for the bonds were fabricated, as were the
glowing endorsements Mr. Odulo put in his solicitations.
Faced with a court order, Mr. Odulo immediately
agreed to stop.
But putting a stop to this kind of a on-line investment
fraud is no longer so simple. The SEC today has far
more scams and schemes to contend with: maverick
brokers soliciting illegal business in stock chat
rooms, small-stock manipulation on investment
bulletin boards, plausible sounding securities that
don't exist, shady offshore investments and
get-rich-quick, money-making cons.
With so many on-line financial scams cropping up
in every conceivable corner of the Web, the SEC has
decided to fight back with its own "cyberforce" -- a
team of agents on a mission to track down, and shut
down, on-line investment fraud.
Two years ago, John Reed Stark, special counsel for
Internet Projects for the SEC's Division of Enforcement, began to notice an increase in questionable Internet activity. As senior counsel for the SEC's Division of Enforcement at the time, Mr. Stark got fired up about combating the rising tide of on-line investment fraud after he completed a six-month detail with the U.S. Attorney General's office battling street crime in the District of Columbia.
"I was put on a succession of jury trials involving guns, drugs and domestic violence," Mr. Stark recalls.
"Something about that experience motivated me and I
came back really wired. I saw the Internet as somewhat
akin to the Wild West, clearly the next frontier for us."
Upon his return to the SEC, Mr. Stark composed a
memo to his boss about Internet fraud that he says
turned into a 100-page proposal for an Internet
"cyberforce." Mr. Stark's proposal was accepted and he
was appointed to oversee the SEC's antifraud efforts.
Rather than a single Internet-focused department, Mr.
Stark oversees a program that encompasses SEC
attorneys, accountants and analysts from the SEC's
regional offices around the country. It's Mr. Stark's
mission to educate the entire SEC work force about
how to track down and stop Internet scammers.
"In the early days, we tended to classify cases as to
whether they were Internet-related or not," Mr. Stark
says. "Now, I think the distinction is becoming blurred, because most investments touch on the Internet in some way. That's why our entire staff is being educated about the dynamics of the Internet."
As part of the educational process, Mr. Stark has spent
the last year traveling to each of the SEC's 11 regional offices to run workshops on finding and prosecuting suspected cases of Internet fraud.
Mr. Stark and others at the SEC are convinced that they
have the regulatory tools they need to make their mission effective. "At this point, we believe the legislation we have is sufficient, even though my sense is that we'll see an increasing number of Internet cases," says Joseph Cella, chief of the Office of Market Surveillance in the SEC's Division of Enforcement.
The SEC to date has pursued about a dozen Internet
cases, and while that number may not appear impressive
Mr. Stark believes it's enough to "send a message." Two
of the cases he pegs as the most important involve
on-line manipulation of stock prices.
The most notorious case tried yet involved Charles
Huttoe, chairman and chief executive officer of Systems of Excellence, a Virginia manufacturer and distributor of video teleconferencing equipment. In November 1996, the SEC brought action against Mr. Huttoe for manipulating the company's stock, which traded under the alluring symbol SEXI.
The SEC alleged that Mr. Huttoe issued false
information about Systems of Excellence and its
business, then sold his shares into a market inflated by the fraudulent information. As part of the scheme, Mr. uttoe distributed millions of unregistered shares to friends and family members, as well as 250,000 free shares to Theodore Melcher, publisher of SGA Goldstar Research, a Memphis, Tenn.-based on-line investment newsletter, to recommend the stock to his subscribers.
In January, Mr. Huttoe was sentenced to a 46-month
federal prison term, two years' supervised release and a $10,000 fine. Just a few weeks ago, SGA Goldstar's
Mr. Melcher was sentenced to a prison term of 12
months, followed by two years' supervised release, and
a $20,000 fine.
Mr. Stark believes the SEXI suit seems to have hit home
with on-line investors.
"I see people asking, 'Is this the next Systems of
Excellence?' in the same way investors talk about hitting on the next Microsoft, and that pleases me," Mr. Stark says. "A lot of investment-newsletter operators have contacted us as well, wanting to know how they can comply with securities law."
It's hard to say, however, whether the SEC's Internet
watchdog program is deterring any would-be scammers.
But some Internet publishers are beginning to feel the
effects of the SEC's enforcement actions.
"Our users are becoming increasingly more reluctant to
post," says Jill McKinney, one of the three people who
operate Silicon Investor, a popular on-line small stock
newsletter and discussion forum. "We are starting to get requests from people who want to post anonymously so as not to invite scrutiny."
A central focus of the SEC's efforts has been to involve the on-line community in its surveillance efforts, a group that Mr. Stark says traditionally has engaged in self-policing. The SEC maintains a busy fraud hotline and on-line complaint center.
"We're getting 75 to 100 e-mails a day -- 440 this past
weekend alone," Mr. Stark says. Recently, the SEC for
the first time took the direct route of posting trading
suspension notices for two stocks -- Green Oasis
Environmental and Genesis International Financial
Services -- on bulletin boards run by America Online
and Silicon Investor.
Mr. Stark's role as an adjunct professor of law at
Georgetown University Law Center also has added to
the Internet program's success. Over the summer, he
taught a course on securities law and the Internet -- a
class he has been asked to teach again this year. As
classwork, students found and tracked suspected cases
of fraud, providing valuable information for the SEC.
"Although I can't talk about specifics, I can say that I learned quite a lot from the class," Mr. Stark says.
The SEC is using what it's learning to help other
regulators, particularly those in other countries, to run their own Internet programs. In May, the SEC joined
forces with the Commodity Futures Trading Commission
to run a workshop for foreign regulators at the CFTC's
offices in Washington.
"We hosted regulators from about 16 jurisdictions at the workshop, including Australia, the U.K., France, Italy, Canada and Taiwan," says Phyllis Cela, chief counsel for the CFTC's Division of Enforcement. "We heard afterward that as a result of the workshop Brazil is starting up a program of its own."
Mr. Stark, Ms. Cela and colleagues from the two
agencies briefed the regulators on everything from setting up a Web page to identifying problematic sites, using search engines, chat rooms, bulletin boards and newsgroups, tracing information to its original sender and prosecuting cases of suspected fraud.
International co-operation is becoming more important,
Mr. Stark says, as Internet fraud increasingly involves
shady overseas products and securities, or foreign
entities offering legitimate services without the authority to offer them to U.S. citizens. The SEC's Office of International Affairs is playing an increasing role in brokering these cases.
"We have a highly effective program for gathering
information," says Paul Leder, deputy director of that
office. "We take a long-term view of every case,
including Internet-related ones. We'll pursue them as
long and as far as need be."
Mr. Leder's office has in place memorandums of
understanding with 20 other countries under which they
can go directly to their foreign counterparts for
assistance. In other countries, they ask for assistance on a case by case basis. "Our network of contacts is
continually expanding," Mr. Leder says.
For evidence that the SEC's reach as a whole is
broadening out to encompass the wider Internet
community, Mr. Stark points to the numerous
bulletin-board postings that are beginning to crop up
about him.
"I get postings from both sides." he says, "those that say 'You just saved me millions of dollars and you're the greatest agency on the face of the earth,' and others that say 'I'll meet you anytime, anywhere Mr. Stark, you just lost me my life savings.'
"We don't have a big press office and most of what we
do is confidential, but we're bringing cases and we're
doing our jobs. My aim is to demonstrate that we are
not wandering aimlessly -- we know what we're doing."
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