Yesterday's boiler rooms move on-line
Bulletin boards, chat rooms the latest places
for unscrupulous traders to goose stock prices
SUSANNE CRAIG and WENDY STUECK
The Globe and Mail
Saturday, August 5, 2000
New York and Vancouver -- SUSANNE CRAIG
in New York
WENDY STUECK
in Vancouver
Internet chat rooms and bulletin boards are the boiler rooms of today, a place where investors looking for easy money will try to play the system to their advantage, securities regulators say.
Enforcement officials from across North America said this week they will watch with interest to see how the investigation by the Quebec Securities Commission into alleged stock manipulation by a TD Evergreen broker on French-language Internet bulletin board webfin.com proceeds.
Toronto-Dominion Bank, the corporate parent of full-service brokerage house TD Evergreen, is also investigating the allegation.
Regulators say it would be unprecedented for a broker to be involved in Internet stock manipulation and the case illustrates how easy it is for anyone to tout or smear stocks on-line.
"The Internet makes boiler rooms almost obsolete," said Marc Beauchamp, a spokesman for the North American Securities Administrators Association, which represents state regulators. "Now, one person in their basement [or] den can set up a boiler room. That is the attraction of the Internet."
Stock manipulation is a criminal offence in both Canada and the United States. In Canada, it carries a maximum penalty of 10 years in jail.
On-line stock manipulation has been a problem for as long as people have been using the Internet to get financial information. Over the years, regulators on both sides of the border have developed a number of methods to catch perpetrators.
In California, for example, a small group of investigators working for the Internet Compliance and Enforcement Unit of the state Department of Corporations boasts an impressive record of catching cyberstock fraud.
Marc Crandall is lead counsel for the unit. He too compares the Internet to a boiler room -- industry jargon for operations in which brokers flog penny stocks by hyping their potential to unsuspecting investors, usually over the telephone.
He said his unit is unique in that it performs undercover sting operations.
"We will go out and surf the Web on non-government computers and monitor bulletin boards for securities fraud," he said. "It allows us to interact with the scammers. We respond to existing illegal solicitations of securities and we use that to get more information."
His unit, which was set up just last year, has issued 100 desist and refrain orders against 274 entities and individuals for fraudulent securities offers on the Internet. Most recently, Mr. Crandall made headlines for a case filed against a man who posed as former MGM chairman and chief executive officer Frank Mancuso on a Yahoo Inc. Yahoo! Finance bulletin board.
Mr. Crandall wouldn't say which sites in particular he monitors, but said the four most popular sites in the United States are siliconinvestor.com, ragingbull.altavista.com, fool.com and finance.yahoo.com. In addition to touting stocks, Mr. Crandall said people have been known to denigrate legitimate companies, a technique known as cybersmear. "Pump and dump" is the phrase used for people who promote a stock on-line and then dump it when the price rises.
Colin McCann, an investigator with the Ontario Securities Commission, said his unit has five people who monitor bulletin boards part-time. The OSC, he said, has not brought charges against anyone, but has several cases on the go.
"The biggest challenge of the Internet is just the size, the number of different forums where you can discuss either stocks in general, or specific stocks, be they in the U.S. or Canada," he said.
He and Neil Winchester, head of surveillance at the Toronto Stock Exchange, said a lot of their energy is focused not on randomly searching bulletin boards for fraud, but rather looking for suspicious trading patterns. If a stock is on the move, staff at both the TSE and OSC will check bulletin board postings to see if they are the cause.
"That gives us a place to start looking because there are literally thousands of chat rooms," Mr. McCann said.
He added that, like the California group, the OSC also does some undercover work.
In British Columbia, the provincial securities commission last year conducted an extensive, week-long sweep of chat rooms and sites touting investment opportunities and products, said media relations officer Dean Pelkey.
To date, there have been no sanctions against any companies or individuals as a result of that investigation. But the British Columbia Securities Commission continues to monitor investment sites and chat rooms, and regularly follows up on tips or complaints it receives from the public.
Like other regulators, the BCSC has limited resources to investigate on-line scams, with only two members of its 25-person enforcement and investigation focus specializing in Internet issues.
"Where we prefer to focus a lot of energy is on investor education," Mr. Pelkey said. "We want to essentially street-proof people, to give them the knowledge to look at things with a more critical eye."
Last month, the BCSC warned investors to be wary of stocks trading on the over-the-counter bulletin board (OTCBB), and said stocks listed on that exchange have become favourite targets for stock manipulation scams, many of which involve Internet chat rooms.
BCSC executive director Stephen Wilson said there is little recourse for innocent investors who get duped by such schemes, since the OTCBB market is outside Canadian jurisdiction.
The BCSC told investors to research OTCBB stocks carefully, and to check the credentials of persons selling or promoting companies on-line. The BCSC also said novice investors often confuse the bulletin board with the more-regulated Nasdaq Stock Market, something unscrupulous promoters have been known to encourage.
Mr. Beauchamp of the North American Securities Administrators Association said it is impossible to say how widespread stock fraud is on the Internet. And while all regulatory agencies police it, a number of the leads come from investors who run into fraud on-line.
"There is a vigilant culture on-line. If you post something and it doesn't smell right, other people come around and try and correct it. That is a healthy thing."
That is what happened in the case that is the focus of the Quebec Securities Commission investigation. An investor who read various postings on a bulletin board regarding delSecur Corp., a tiny company traded on the OTCBB, became suspicious of the claims and complained to both the bank and regulators. |
