One other thin rmj2. As long as You want to brag about all your great deeds while protecting the masses heres a little brag from Me. This was done before You were ever a member of SI.
How to Spot an Investment Con
Before It Snares You in Its Web
By NANCY BOYD KENNEDY
Special to THE WALL STREET JOURNAL INTERACTIVE EDITION
Last year, Frank Fontaine, a 56-year-old retired
businessman in De Pere, Wis., read about a company
called Systems of Excellence on a Web site maintained
by SGA Goldstar Research Inc., a Nashville, Tenn.,
newsletter publisher.
Mr. Fontaine, who
manages full-time an
inheritance he received a
few years ago, was
intrigued by Systems of
Excellence, a McLean, Va., maker of
video-teleconferencing equipment with the racy stock
symbol SEXI. On May 7, 1996, he bought 800 shares
at $1.14 a share.
Over the next few months, SGA's newsletter touted
Systems of Excellence repeatedly, Mr. Fontaine says,
urging subscribers to buy the stock.
And that's just what he did. Between May and
December, he purchased 24,000 shares of Systems of
Excellence, committing $33,792 of his inheritance.
But unknown to Mr.
Fontaine, Systems of
Excellence's chairman and
chief executive officer,
Charles Huttoe, was
selling his own shares into
a market inflated by false,
favorable press releases,
according to the Securities
and Exchange
Commission. The SEC
also charged that SGA
Goldstar received shares
in the company to write
favorably about it -- and
sold them for a hefty
profit.
The SEC filed a complaint
against Systems of
Excellence for
manipulating its stock by
making rosy company
forecasts and then selling
shares as its stock shot
higher on the news. In
January, Mr. Huttoe was
sentenced to a federal
prison term of 46 months
and fined $10,000 for one
count of securities fraud
and one count of money
laundering. In all, the SEC
estimates, investors were
duped out of $12 million.
SGA's publisher, Theodore Melcher Jr., is trying to
settle SEC civil charges that he profited illegally by
promoting and profiting from stock he owned in Systems
of Excellence, he says.
"I wish we had never heard of Systems of Excellence
and I'm hopeful we can come to some rational
settlement," Mr. Melcher says.
The SEXI scenario, known in Internet chat rooms as
"the old pump and dump," has played itself out time and
again on the Internet. But while it's among the most
widespread of the scams perpetrated on unwitting
investors who frequent on-line stock chat rooms and
discussion boards, it's far from the only con to be found
in cyberspace. Experts say the Internet is shot through
with fraudulent investment schemes of every description.
"I've worked on street crime in Washington, D.C., been
an SEC attorney for four years, and concentrated on the
Internet for two years, and nothing has gotten me more
irritated than Internet scams," says John Reed Stark, the
SEC Enforcement Division's special counsel for Internet
projects.
If you're rooting around on the Internet for riches, here
are a few of the common investment scams that you'll
likely find and what you can do to spot them.
Pump and dump scams. Typically, these schemes
involve micro-capitalization stocks, such as Systems of
Excellence, that are thinly traded and difficult to
research. "No analysts follow these stocks, so you're at
the mercy of anyone who claims to have information,"
says Douglas Wilburn, securities commissioner for the
state of Missouri.
A company being touted on-line may be nothing more
than a shell entity, created to make money through the
manipulation of its stock. These companies often hire
public relations firms to disseminate misleadingly positive
press releases. On Internet bulletin boards and chat
rooms, you might see postings screeching about the
company's prospects -- HOT TIP! 400% RETURN IN
LESS THAN A YEAR!! -- that tend to look like
conversations going on between ordinary investors. You
can learn more on how to protect yourself from these
types of scams at the "Cyberspace Fraud and Abuse"
Web page of the North American Securities
Administrators Association in Washington.
Experts advise that it's crucial to arm yourself with as
much knowledge as possible about a company before
investing, and to try to determine who is behind the
information being provided. "Getting information like
financial reports and earnings estimates [from
companies] is essential," says Scot Rosenblum, publisher
of Individual Investor Online in New York. "Get a sense
of who you're talking to and follow their ideas over time
to see how accurate it is."
It's also important to look for any disclosure statement
on a stock-discussion Web site. "Most small-stock
pages are paid public relations," says Kevin Lichtman,
who publishes several small-stock pages out of his
Altamonte Springs, Fla., offices under the name
FinancialWeb. "Plenty of people are violating the SEC's
rules about disclosure."
Mr. Lichtman's page currently carries an article about
small-stock financial disclosure reports that lists suspect
statements on representation, such as "is retained as
investor relations counsel."
Yet Mr. Lichtman's own disclosure statement says that
employees of his company may "from time to time" buy
or sell securities mentioned on his pages. While he says
he personally doesn't trade in the stocks discussed in
FinancialWeb, he plans to change his company policy to
state clearly that his employees are prohibited from
making stock transactions relating to any company
mentioned in FinancialWeb two weeks before and four
weeks after the company is mentioned.
(Employees of Dow Jones & Co., publisher of The Wall
Street Journal Interactive Edition, aren't allowed to
engage in short-term trading at all, and must hold
securities for a minimum of six months. They are
prohibited from investing in speculative instruments, such
as futures and options, and aren't permitted to engage in
short-selling.)
Fictitious or unregistered financial instruments.
Retirees scouring the Internet seeking information for
conservative bond or bond-derivative investments might
be attracted to a pitch for an investment vehicle known
as a prime bank debenture or a negotiable letter of
credit. But both are actually phony securities with
plausible sounding names.
"It's the somewhat financially sophisticated person who
falls for this one," says Paul Luehr, chairman of the
Federal Trade Commission's Internet coordinating
committee. "He says, 'Yeah, prime bank, I've heard that
term.' "
Also in this category are stock offerings that are
unregistered with the SEC or with individual states.
"We're finding unregistered securities the major area of
noncompliance," says Thomas Geyer, Ohio's securities
commissioner.
Through Ohio's Internet Monitoring Program, staff
attorneys search the Internet for unregistered securities
offerings. Mr. Geyer's office contacts the person or firm
making the offering, and "most people respond by
putting a disclaimer on their page that the security is not
available to Ohio residents, or they make a filing."
Companies that don't respond may find themselves
included on the Ohio Department of Commerce's
Securities Web site with a warning to investors.
Get-rich-quick schemes. All sorts of things fall under
this moniker, including chain letters, business opportunity
schemes and multilevel marketing pitches. These scams
run the gamut from old-fashioned vending machines to
high-tech wireless-cable and computer-equipment
production, but all have one thing in common: They
require participants to send money to get started. "It's
usually couched as an investment opportunity and
promoters make inflated earnings claims," the FTC's Mr.
Luehr says.
In an effort to warn investors about these bogus
opportunities, the FTC posted a fake Web page, called
the Personal Prosperity Page. Using language taken
from pages the FTC has identified as phony, the page
promises $2,000 a day in profits just from turning on
your computer. When you get three pages into the pitch,
however, the FTC unveils the fraud with a warning to
investors.
Chain letters and multilevel marketing pitches -- more
popularly known as pyramid schemes -- rely on
investors to recruit other investors. Early investors may
make some money, but the pyramid collapses when no
further investors can be found. For a look at some of the
more outrageous scams, take a look at the newsgroup
alt.business.multi-level.scam.scam.scam, in the area
labeled "fleecing people for fun and profit."
If you're unsure whether the opportunity you're
considering is legitimate, Mr. Geyer, the Ohio securities
commissioner, suggests running through his four-part
test. "It's likely a scam if the investor has no management
control, furnishes money for the company, is made a
guarantee of profit or representation of profit levels, and
the company presents some sort of common enterprise,"
he says.
Securities administrators are doing what they can to
uncover these and other frauds. But, the SEC's Mr.
Stark says the job is becoming tougher as scammers
increasingly tout offshore opportunities or international
investment products that are little understood, and the
nature of the fraud not as clear.
Still, federal agencies have had a lot of success with
various Internet monitoring programs. In particular, says
Mr. Luehr, interagency "Surf Days" have produced
promising results.
Last December, the FTC, SEC and other federal
agencies spent a day monitoring the Internet for pyramid
schemes, using keyword Web searches. Regulators
turned up 750 suspect sites and sent e-mails to 500 of
them. About 18% of the sites were shut down or
modified. The agencies later cooperated on another
so-called Surf Day searching for suspect business
opportunities that netted a 25% shut-down rate.
Investors should educate themselves and, like Mr.
Fontaine, make complaints when they feel they have
been the target of scammers, experts say. The FTC,
SEC, and NASAA all have educational and advisory
material on their home pages, and all provide the means
for lodging a complaint -- the SEC site alone receives
50 e-mails a day, says Mr. Stark. In addition, the
National Fraud Information Center, operated by the
National Consumers League in Washington, posts a
daily Internet Fraud Watch page on its site, and
provides on-line forms to report a suspected fraud.
On the whole, Internet users form a "vigilant,
self-policing community" that does its own
cybersleuthing, says the SEC's Mr. Stark. But the
regulator warns that even the most sophisticated person
can be scammed on-line.
"There's a certain culture of trust and benevolence on the
Net that worries me," he says. "You can find people to
help you with all sorts of things, from travel to medical
information. But that same trust can't translate to your
investments." |
