ONLINE FRAUD Senator Wants to Give SEC More Firepower Vs. Online Fraud
By Judith Burns
WASHINGTON (Dow Jones)--The Securities and Exchange Commission
would get more firepower to combat online stock fraud and bar
"rogue brokers" under legislation now being drafted by Sen. Susan
Collins, R-Maine.
"We're definitely going to pursue that," Collins told Dow Jones
on Tuesday at the conclusion of a two-day Senate subcommittee
hearing on Internet stock fraud.
Collins' bill, which is still being drafted, would permit the
SEC to bring enforcement actions against online stock fraudsters
based on investigations conducted by state regulators.
Currently, the SEC can't rely on state investigations into
stock fraud, and must conduct its own, separate probes. Relying
on states' findings would be welcome, Richard Walker, director
of the SEC's enforcement division, told the Senate Subcommittee
on Investigations on Tuesday.
"That would allow us to bring cases much faster" than is possible
now, Walker testified. He added that in cases of online fraud,
"time and speed are sometimes of the essence."
State regulators who testified before the same panel, chaired
by Sen. Collins, also endorsed the idea, saying it makes no sense
for federal regulators to duplicate stock-fraud investigations
already done at the state level.
Besides giving the SEC the ability to piggyback onto state
investigations of online fraud, Collins said, her bill would crack
down on "rouge brokers," putting them out of business for good
so they just don't move to another firm or another state.
"It seems to me that we ought to crack down on this whole area,"
Collins said, suggesting regulators consider a "one strike and
you're out" approach to brokers with severe disciplinary problems.
Walker said one change that might help would be to modify current
laws on "penny stock" fraud, which allow the SEC to bar rogue
brokers from promoting other penny stocks. Since penny stocks
are defined as securities trading for $5 a share or less, unscrupulous
promoters can stay in business by pushing stocks just above the
$5 threshold, Walker noted.
Expanding the definition of a penny stock, or adding a ban
on the promotion of microcap stocks to the existing penny-stock
law, might crack down on rogue brokers, Walker indicated. He also
said lawmakers might consider allowing limited use of online,
undercover operations by the SEC.
"Currently, federal law does prohibit us from using aliases"
said Walker. Unlike state regulators, who aren't bound by federal
privacy laws, SEC officials must identify themselves as federal
regulators, and can't assume a false identity to conduct undercover
work.
According to Walker, the SEC might find it "very useful" to
act anonymously in online investigations, but he stressed that
the agency wouldn't want the ability to conduct undercover operations
that aren't Internet-based.
The growing popularity of the Internet and online investing
has led to a growing number of Internet-based stock frauds, regulators
agreed. Walker said the SEC is "challenged, if not strained" by
the rapid growth of online fraud and must divert resources from
other areas to keep pace with the workload. Last July, the SEC
created a separate office for Internet enforcement, which has
a handful of fulltime staffers, supplemented by 125 "cybercops"
spread throughout the agency.
"Government has been slower than the scam artists to use the
Internet," noted New Hampshire state securities regulator Peter
Hildreth, who is president of the North American State Securities
Administrators Association.
But, Hildreth said state regulators are becoming more active
in fighting online fraud. Ohio, for instance, is "listing the
bad boys" on the state securities division's Web page, which identifies
"Online Securities Offerings that Ohio Residents Should Avoid."
Collins likes the fact that Ohio names stocks to avoid, and
includes risk factors and other tips for investors. Consumers
who take the time to read the information "would be very unlikely
to invest" in such stocks, she said.
The Maine Republican urged regulators to make more use of the
Internet to fight online fraud, for instance, by providing hypertext
links to regulatory Web sites from sites that promote suspicious
stocks. Hildreth said the idea makes sense, and that legitimate
promoters shouldn't object to such links.
Regulators took a dimmer view of the idea of providing a "Good
Housekeeping Seal of Approval" for legitimate stocks offered online.
Walker said it's unlikely that government agencies could do so,
but indicated an independent, third-party, private-sector company
might want to assume the job.
Collins said she expects her legislation will be introduced
later this spring, and anticipates the bill will receive bipartisan
support.
-By Judith Burns; 202-862-6692; judith.burns@dowjones.com"
|
