SEC Investor Beware
Office of Investor Education and Assistance
June 1996
Investment Fraud and Abuse Travel to ...
The explosion of commercial on-line services and the rising popularity of the Internet have created new opportunities and new dangers for investors. This flyer alerts you to the types of investment fraud and abuse used on-line and suggests ways to avoid becoming the next victim.
The On-Line World:
What Is It?
The on-line world consists of thousands of electronic networks linking computers, people and information all across the world. Commercial on-line services boast millions of subscribers who use personal computers for public discussion, to exchange electronic mail, and to read publications. Millions of other computer enthusiasts use the Internet, a "network of networks," that weaves together thousands of computers into a global web of information. Although this can be a valuable source of investment information, the world of on-line computing can also be complicated, confusing and even dangerous.
One of the most attractive features of on-line computing is communicating to a large audience without spending a lot of time, effort, or money. By posting a message on a bulletin board, using a chat room, or constructing a site on the Internet, you can broadcast messages to tens of thousands of users. Unfortunately, this powerful tool can cause real problems when used to defraud investors.
The On-Line Investment Scam:
New Medium, Same Message
While investment con-artists have been quick to seize upon on-line computing as a new way to cheat investors, the types of investment fraud seen on-line mirror frauds perpetrated over the phone or through the mail. Consider all offers with skepticism.
Investment frauds usually fit one of the following categories:
The Pyramid
"How To Make Big Money From Your Home Computer!!!" One on-line promoter claimed recently that you could "turn $5 into $60,000 in just three to six weeks." In reality, this program was just an electronic version of the classic "pyramid" scheme in which participants attempt to make money solely by recruiting new participants into the program. This type of fraud is well-suited for the world of on-line computing where a troublemaker can easily send messages to a thousand people with the touch of a button. Unfortunately, these "investment opportunities" collapse when no new "investors" can be found.
The Risk-Free Fraud
"Exciting, Low-Risk Investment Opportunities" to participate in exotic-sounding investments, including wireless cable projects, prime bank securities and eel farms, have been offered on-line. One promoter attempted to get people to invest in a fictitious coconut plantation in Costa Rica, claiming the investment was "similar to a C.D., with a better interest rate." Promoters misrepresent the risk by comparing their offer to something safe, like bank certificates of deposit. Sometimes, an investment product does not even exist - they're scams.
The "Pump And Dump" Scam
It is common to see messages posted on-line urging readers to buy a stock quickly that is poised for rapid growth, or telling you to sell before it goes down. Often the writer claims to have "inside" information about an impending development, or will claim to use an "infallible" combination of economic and stock market data to pick stocks. In reality, the promoter may be an insider who stands to gain by selling shares after the stock price is pumped up by gullible investors, or a short seller who stands to gain if the price goes down. This ploy may be used with little-known, thinly-traded stocks.
The SEC is Tracking Fraud
In investigating on-line fraud, the SEC can get a court order to stop scams. The SEC took action in the following cases:
Pleasure Time, Inc: Astronomical profits were promised in a worldwide telephone lottery. Over two million dollars of unregistered securities were sold to 20,000 investors who were encouraged to recruit other investors on the Internet. The SEC filed a lawsuit and the company's assets were frozen.
IVT Systems: The company solicited investments to finance the construction of an ethanol plant in the Dominican Republic. The Internet solicitations promised a return of 50% or more with no reasonable basis for the prediction. Their literature contained lies about contracts with well known companies and omitted other important information for investors. After the SEC filed a complaint, they agreed to stop breaking the law.
Scott Frye posted a notice that he was looking for investors for two Costa Rican companies that produced coconut chips. He claimed A&P supermarkets placed an order to buy all the chips he could produce. He was forced to withdraw his notice when his lies were discovered.
Gene Block and Renate Haag were caught offering "prime bank" securities, a type of security that doesn't even exist. They collected over $3.5 million by promising to double investors' money in four months. The SEC has frozen their assets and stopped them from continuing their fraud.
Daniel Odulo was stopped from soliciting investors for a proposed eel farm. Odulo promised investors a "whopping 20% return," claiming that the investment was "low risk." When he was caught by the SEC, he consented to the court order stopping him from breaking the securities laws.
Here's How You Can Protect Yourself
Follow our checklist and you should steer clear of on-line fraud, but first a word about the information these companies are required to file at the SEC and some basic tips.
The SEC does not require companies that are raising less than one million dollars to be "registered" at the SEC, but these companies are required to file a "Form D" with the SEC. The Form D is a brief notice which includes the names and addresses of owners and promoters, but little other information. Call the SEC at (202) 942-8090 to get a copy of the Form D. If there isn't a Form D, call the SEC's Office of Investor Education and Assistance at (202) 942-7040. But don't stop there. You should always check with your state securities regulator to see if they have more information about the company and the people behind it, and if your state regulator has cleared the offering for sale in your state.
Because these small companies are usually the most risky investments that you can make, you should always get as much written information as you can from the company. Check out this information with an unbiased and informed source -- your broker, accountant or lawyer. Your state's securities regulator should be your first stop, but you may also want to visit your local library and talk with the librarian about other sources of information. There are a number of services that provide a constant stream of information about the financial condition of companies.
Make sure you know as much as possible about the company, before you invest. Don't ever rely solely on what you read on-line to make an investment decision. |
