Raz, John Stark....hero or goat ?
The SEC swoops down on internet stock scams
Wall Street's top cop throws the spotlight on
securities frauds proliferating on the Web
By Andrew Marks
moneydaily.com
Investors applauded Wednesday as the U.S. Securities
and Exchange Commission, in 23 separate actions,
charged 44 individuals and companies with committing
securities fraud over the Internet.
The action is the most comprehensive the SEC has taken
since it began policing cyberspace in 1995. The agency,
says John Stark, head of the SEC's internet
enforcement unit, is now pursuing "a well-defined and
programmatic approach to addressing internet fraud. We
are specifically going after the online newsletters,
people who tout stocks, especially poorly
followed and thinly traded micro caps, on message board
postings, and in so-called investing websites."
"The fact that a cop is on the beat should make the
internet a safer place for people to invest and to seek
investing advice," said Lawrence Greenberg, general
counsel for the Motley Fool
(http://www.motleyfool.com). "The internet has suffered
from a bit of a lawless, Wild West environment that's
allowed people to do this kind of thing all too
easily."
Stark's unit, created in July, has been fielding an
average of 120 complaints per day from consumers.
Richard Walker, SEC director of enforcement,
said those charged had touted 235 microcap companies:
"Not only did they lie about their own independence,
some of them lied about the companies they featured,
then took advantage of any quick spike in price to sell
their shares for a fast and easy profit."
The charges covered several phony practices, most of
them familiar cons used elsewhere before the Web became
popular:
1) Spamming: Some of the accused allegedly sent out
mass emailings recommending stocks, without disclosing
that companies were paying them to tout the shares.
2) Pumping and Dumping: Masquerading as independent
experts, some of the accused allegedly recommended
stocks on public message boards such as the top-rated
(and legitimate) Silicon Investor site to generate
demand, and then sold the stocks as eager investors bid
up the price.
3) Touting: Some of those fingered by the SEC
allegedly shilled for companies by recommending their
stocks for a fee, a relationship they did not disclose
to their readers.
4) Scalping: Scalpers allegedly bought a stock, then
recommended it through Internet newsletters and
investment sites without disclosing their ownership
position, then sold the shares as the price rose.
One company that allegedly did all this and more: The
Future Superstock (http://www.futuresuperstock.com), an
internet newsletter and companion web site with more
than 100,000 subscribers.
The SEC alleges that FSS and Jeffrey Bruss, its
director and sole shareholder, recommended 25 microcap
stocks while failing to adequately disclose receiving
more than $1.6 million in cash and stocks from the
companies recommended. "Bruss went way beyond that,
though, "says Tom Melton, the SEC's trial attorney in
the case against FSS. "He also sold into the stocks he
touted; he falsely claimed that he had performed
independent due diligence on the companies; he made
false claims about the performance of his recommended
stocks. He's the poster child for the SEC's fight
against internet fraud."
Melton offered Keystone Energy Services (OTC ISSUE:
KESE) as one example of Bruss' practices. Bruss, says
the SEC, was paid by Keystone to profile the stock as
FSS' "Stock Pick of the Month" in October, 1997. At the
time, it was trading at $5. When he reviewed the
stock's performance in June of 1998, he ignored the
fact that it was trading at less than $1, noting only
that it had reached a high of $12.875. "And that was an
intra-day high; it's closing high was $9," Melton
notes.
Stark attributes the proliferation of internet
securities fraud to two simultaneous developments: The
greatest bull market to date, which has drawn legions
of new and unsophisticated investors into the market,
coupled with the rapid growth of the Internet as an
information source. The scams themselves, Stark adds,
are nothing new. Most of the SEC charges, after all,
were based on Section 17(b) of the Securities Act of
1933. What's new is that the con men have found a new
medium in which to play.
Indeed, the proliferation of investing sites, online
newsletters and discussion forums has transformed the
way many people gather information when mulling
investments. On one hand, the legitimate news and
information sites give the small investor ready access
to the kind of detailed, expert information that was
once the domain of brokerage houses and their biggest
clients. The Motley Fool and Silicon Investor
(http://www.siliconinvestor.com), for example, have
become essential investment resources for many
individuals, allowing them to get in on huge success
stories like Netscape (NASDAQ: NSCP), America Online
(NYSE: AOL), and Amazon.com (NASDAQ: AMZN).
Con artists fed on this investment hunger, pretending
to be ordinary investors in some discussion groups, or
masquerading as independent experts with their own
websites.
Most of the frauds identified by the SEC concern shares
of small firms listed on the NASD OTC Bulletin Board
(OTCBB), a National Association of Securities Dealers
quotation service for "unlisted securities" that are
not actually traded over the counter or on any of the
three major U.S. stock exchanges. The OTCBB lists about
7,000 securities of small corporations, some with
little or no operating business. There are no
requirements for listing, although the NASD has
proposed minimum qualifying standards.
Even as the SEC was gearing up to expand enforcement
efforts on the Web, some self-appointed detectives were
already peering down dark alleys and publishing
warnings about questionable advice and suspect
websites.
One such vigilante website, The Stock Detective
(http://www.stockdetective.com), previously had
fingered twelve of the companies cited in the SEC
complaints on its bad guy roster, "The List." A common
factor that draws the Stock Detective's attention is
something that any prudent investor should look for in
evaluating financial advice: a personal stake in the
performance of the stocks recommended.
While the sheer availability of free financial
information on the Web is a boon, investors need to be
sure they are taking their advice from trusted sources.
And if the deal seems too good to be true, it probably
is. |
