Boiler-Room' Scams Shift to the Internet. Investment Promoters Move To Web From Their Phones.
Benjamin Novick, a Los Angeles private investigator, always hangs up on
telephone salesmen offering hot investments. One guy tried to sell him
futures options. Another memorable pitch involved gold bars.
"I never respond to those things," he says.
Then one day last summer, he received an
intriguing proposal through e-mail. Small
investors were being offered partnerships by Electric Choice Investments
Inc. of Boca Raton, Fla., in a venture that was poised to cash in by selling
electricity in the newly deregulated California power market: "Profit from
the breakup of America's largest monopoly."
To Mr. Novick, the e-mail and its accompanying Web sites rendered the
offer credible. The Internet also seemingly helped him make inquiries into
the investment and the promoters. When it all checked out, he plunked
down $120,000 -- to his dismay and embarrassment.
The venture quickly turned sour, leaving the 40-year-old Mr. Novick and
some 600 other investors throughout the country with losses that they
estimate could be as much as $10 million.
Telemarketers still crowd into smoke-filled rooms to cold-call prospects
using a telephone book. But law-enforcement officials say these traditional
boiler-room operations are going the way of the horse and buggy,
increasingly replaced by investment schemes using the Internet to find and
persuade investors.
While some Internet sites offering
investments are legitimate,
government officials say the number
of questionable securities offerings is
burgeoning, though there aren't any
reliable statistics because of the
nature of the Internet.
For one thing, the Internet is
cheaper. Telemarketers typically pay as much as $100 for a list of 1,000
people to call, while it costs the same to send bulk e-mail to 100,000. The
access to potential customers is better, too. Many people nowadays use
caller I.D. or answering machines to dodge telemarketers, but those same
people often eagerly open their e-mail, which still remains a bit of a
novelty.
Cyber-promoters of questionable sites also are harder to oversee.
Regulators often must use subpoenas just to learn who they are, since
some of the e-mail and Web site pitches are sent anonymously. And Web
sites are popping up that can't even be seen by investigators using
government computers to scan the Web. While visible to the rest of the
world, some questionable sites use technology to block out regulators,
who are left with the false impression that the sites have shut down.
Internet experts say this little-known tactic grew out of the computer tricks
commonly used by child pornographers and militia groups to fly their Web
sites below the government radar. "These are sophisticated people," says
Detective Michael Menz of the Sacramento (Calif.) Valley Hi-Tech Crime
Task Force, referring to Web sites that use blocking techniques.
Such stealth has prompted the government's
cyber-cops to go undercover to search for
sites offering questionable investments. But
these patrols have only just begun and are
dwarfed by the Internet's mass. When
detected, the promoters don't even have to pack their bags, but simply can
restart their operation elsewhere in cyberspace. "They pop out of nowhere
... and then disappear," says Mark Herr, New Jersey's chief of consumer
affairs.
California and other state officials say the venture marketed by Electric
Choice is typical of the types of investments being peddled on the Internet,
as are the individuals who invested in it.
Some, like Steve Zeimet, a 41-year-old electronics technician from
Auburn, Wash., who invested about $10,000, sunk 401(k) retirement
savings into the deal. Others, like retiree Reynold Frank, 49, had been so
cautious about investing their money that they didn't even own stocks. But
Mr. Frank, who breathes with the help of oxygen bottles, invested with
$5,400 from his wife's death benefits. "When you're on Social Security,
that is a mountain of money," he says.
The investors say they were impressed by the presentation's sophistication.
The Web site even had a video link, while the deal's structure involved a
complex series of partnerships.
As do many such offerings, the proposal sounded logical. California had
opened its electricity market so consumers could buy power from any
seller, rather than only from a large utility with a monopoly. In theory, this
means that an entrepreneur who finds and buys low-priced electricity on
the spot market can then resell it for a profit; resellers only have to pay a
$100 fee to register with the state.
In reality, selling electricity is a highly competitive and complicated business
that so far hasn't resulted in significant profits for would-be entrepreneurs,
according to the state's public-utilities commission. As a result, most of the
several hundred registrants have languished without actually selling any
electricity, state officials say.
Despite the obstacles, last year, two groups of promoters from southern
Florida who registered in California began telling investors they could make
a bundle.
The first involved a classic telemarketing ploy, according to federal
regulators. Friendly Power Co. used boiler rooms to sell investments in
limited partnerships that would market electricity in California, according to
the U.S. Securities and Exchange Commission, which got a court order
barring Friendly from making fraudulent securities sales. In May, a federal
judge in Florida imposed a $200,000 fine on the firm's owners and
ordered them to disgorge $2.4 million that they had raised from investors.
Although big returns had been promised, an SEC-appointed receiver says
the promoters took 80% of the investors' money as fees.
Weeks later, a second group also began offering investments in reselling
electricity in California. This venture involved Full Power Corp., and
partnerships also were sold, with one difference. Electric Choice, a chief
marketer of the Full Power partnerships, used the Internet -- with more
success.
Some investors ran across the proposal in surfing the Web for investments.
Most received an e-mail solicitation with a sizzling pitch: "Over 50%
Annual Returns Tax Free."
The e-mail connected to a Web site that elaborated with news blurbs and
video feeds. Potential investors were then sent to another Internet site,
where, some investors say, they thought they were getting independent
verification of Full Power's credentials. Instead, they landed on a site
owned by Stockbroker Associates Inc. of Beverly Hills, Calif., which was
paid $5,000 a month to promote Full Power; among other things, it posted
press releases about Full Power's plans. The fee was disclosed in fine
print.
Full Power, which is now based in Lakewood, Ohio, says its intentions
were genuine. Its chief executive officer, Donald Johnson, says the firm in
March abandoned its plans to market electricity in California because it
misjudged the state's market.
Mr. Johnson also maintains that Full Power had nothing to do with the
partnership sales. Rather, he says Full Power sold its "license" to another
firm, which has gone out of business, and that this firm in turn dealt with the
marketers. Nonetheless, he says that all he observed was above board.
"The investment was plainly marked with all of the risk factors," he says.
Electric Choice's owner, Donald LaBarre, denies that he misled investors.
In a statement issued through his attorney, Mark Cohen, Mr. LaBarre said:
"To the contrary, significant written information was provided to investors
in limited liability partnerships. In particular, investors executed subscription
documents, investor questionnaires and risk disclosure documents
containing detailed and specific advisements on the nature of the investment
and the risks associated therewith." Mr. LaBarre in the statement said
investors also were orally advised of the risks.
Electric Choice's sales were helped by another twist in its pitch: Investors
were directed to call what some say they thought was a Better Business
Bureau-type watchdog to check out the deal. Rather, the promoters had
directed them to a for-profit referral firm, National Business Opportunity
Bureau of Norcross, Ga.
Electric Choice paid $450 to be listed with the NBOB. Electric Choice
made further payments to NBOB for the names -- at $20 apiece -- of
everyone who made an inquiry to NBOB, so these potential investors
could be targeted for more sales pitches. NBOB owner Steve
Mooneyham says his firm began disclosing these fees to callers last year
when asked to do so by the Florida attorney general.
Investors, who say they were wowed by all they saw on the Internet and
heard from NBOB, then typically phoned the promoters, not vice versa. "If
you can get investors to call you, you're much more likely to make the
sale," says Bill McDonald, an enforcement chief with California
Department of Corporations.
State regulators scrambled to catch up after receiving complaints from
investors alleging that they had been pressured by Electric Choice to buy
and were given misinformation by Electric Choice, such as that electricity
sales had already begun. Indiana, Alabama and several other states issued
cease-and-desist orders against Electric Choice for failing to register the
securities sales, although those states took no action against Full Power.
But the Pennsylvania Securities Commission did name Full Power in its
order. Mr. Johnson said he was unaware of the action.
Investors say they have lost 80% of their money in partnerships sold to
them by Electric Choice, which they were told was spent on Full Power's
license and the marketers' fees. Full Power says it is offering to trade the
remaining value of their investments for unregistered shares in its penny
stock.
Meanwhile, the investors are getting a new pitch. "Watch how your money
could grow three to five times in as many years," reads the e-mail. It
doesn't name the promoter. But one investor who sent for more details,
Samuel Smullin of North Turner, Maine, says he received a letter from Mr.
LaBarre, of Boca Raton, this time selling shares in a mobile-radio
franchise. "We believe this is an exciting opportunity," the letter says. The
e-mail also linked to a Web site, which features a picture of Vice President
Al Gore and a quote from him calling telecommunications a "lucrative
marketplace."
Investigators in several states have discovered that they can't access the
Web site while using their government computers to surf the Web, but they
can on their home computers. They have been similarly blocked by some
other Web sites promoting electricity sales and some sites offering
foreign-currency-exchange investments, a number of which have been shut
down by regulators because of securities violations.
Mr. LaBarre's attorney said in a statement: "The matters are all either being
presently contested or were settled without any finding of wrongdoing on
the part of Electric Choice Investments."
Computer experts say that Web sites can readily block government
officials by recognizing the ".gov." or ".state." in their Internet addresses.
Or they can block out an entire Internet-service provider, if it is known to
have government officials among its customers. Since many such service
firms are small operations, the promoter doesn't risk losing many potential
victims.
The blocking can be overcome by switching into a nongovernment
computer, says David Jonson, an assistant attorney general in South
Carolina. "It's a minor hurdle -- as long as you know about it." But the
blocking technique still is not widely known among state security
regulators, who for the most part also don't have nongovernment Internet
accounts in their offices. Says Matthew Bahrenburg of North Dakota's
securities commission: "I might have to do more surfing at home." |
