Securities fraud over Internet flourishing in U.S.
.c Kyodo News Service
WASHINGTON, May 25 (Kyodo) -- By: Keiji Urakami The Internet, which links an estimated 150 million users across the globe, is behind the rapid growth of electronic commerce.
Unfortunately, however, it also provides fraudulent operators with a new and efficient medium to swindle millions of dollars from investors on the lookout for hot stocks.
For perpetrators of fraud, the Internet is an attractive tool because it can provide instant contact with potential victims -- and at far lower costs than with the more traditional means of telephone or mail.
What is more, fraudulent operators can remain anonymous while committing crimes from any location in the world, allowing them to escape regulations by U.S. law enforcement authorities.
Richard Hillman, associate director for financial institutions and market issues at the U.S. General Accounting Office, said swindlers often use professional looking Web sites that appear to offer legitimate investment information and on-line newsletters.
He said that usually the nature of investment fraud committed over the Net is basically the same as that committed through the more traditional media.
In a typical case, an individual who owns shares in a certain company circulates positive but false information about the company to increase investor interest and to drive up its price, he said. The individual then sells the shares to quickly reap profits while the investors are hit with large losses after the inflated stock prices turn lower later.
That was the case with Galen O'Kane, 38, a resident of Ellsworth, Maine. In 1997, he came across an Internet newsletter, The Future Superstock, operated by a man named Jeffrey Bruss. One of its stock picks of the month was in a company called Electro-Optical, a producer of fingerprint identification devices small enough to fit on a computer mouse.
O'Kane invested about 5,400 dollars in the company, purchasing 900 shares through an on-line account at slightly under 6 dollars per share. ''I was impressed with the engineering and low unit-cost of Electro-Optical's technology and envisioned the product being used as a security device on everything from ATMs to door locks to computer mouses,'' he said.
Convinced that the company had tremendous growth potential, O'Kane had invested more than 23,000 dollars in the stock by January 1998.
But then in March that year, he stopped by Electro-Optical's office in a Boston suburb during a personal trip.
''I looked into the building and was shocked to find that the building was completely empty. I expected to see an assembly line, equipment and employees, but there was nothing,'' he said.
''I felt that Electro-Optical had completely misrepresented the nature of its apparently nonexistent operation,'' said O'Kane, who lost more than 20,000 dollars after selling 1,900 shares of the stock for 1.10 dollars per share.
It was disclosed later that a company called Barrow Street Research had been paid to promote the Electro-Optical stock.
''Many bulletin boards on the Web are full of information from sources that are not looking out for your best interest,'' O'Kane said.
In the first half of 1998, about 22% of all retail securities transactions in the United States were conducted over the Net, according to a survey by Broker Watch.
It predicts that the total number of on-line brokerage accounts will nearly triple from 5 million in 1998 to more than 14 million in 2002.
So naturally the rapidly growing field of electronic commerce has provided a multitude of fraud opportunities.
Information previously available only to investment professionals is now available universally on-line at virtually no cost. As a result, it has become extremely difficult for ordinary investors to accurately evaluate the information on offer.
Howard Friedman, law professor at the University of Toledo, said, ''Even well-educated investors are seldom able to truly digest and analyze the meaning of the flood of raw information available on-line.
''They rely on postings from often-unknown sources who seem to have filtered through the mass of available information. This is the core source of much securities fraud on the Internet,'' Friedman said.
In each fraud case, the victim relies on exaggerated recommendations transmitted on-line by someone who stands to profit from the victim's belief that the information is accurate, he said. ''The profit may come from secret payments by others to the person promoting the stock, or may be realized when the stock price rises and shares secretly held by the person engaging in the promotion are dumped on the market.''
According to the Securities and Exchange Commission (SEC), the number of complaints filed with the commission which are potential Internet fraud cases grew from 10 to 15 a day in 1996 to between 200 and 300 in early 1999.
In October 1998, the SEC announced nationwide enforcement against alleged Internet fraud, charging a total of 44 individuals or companies. Another 13 individuals or companies were charged in February this year.
Since 1995, the SEC took 66 administrative actions to combat Internet securities fraud, and about a half of them had been concluded with violators required to pay civil penalties. Two cases involved criminal convictions resulting in prison sentences for seven individuals.
The SEC has authority to seek penalties ranging from 5,500 dollars to 1.1 million dollars or up to three times the amount of the illegal gains.
Last year, it created a special team to deal with growing reports of fraud by promoting investor education. The Office of Investor Education monitors Web pages to identify potential securities fraud while providing training to staff from state regulatory agencies and international regulators.
In February this year, the SEC also announced some regulatory amendments to address loopholes which fraud perpetrators may use.
''The experience reminds me of the old saying, 'If it's too good to be true, then it probably is,''' said Maine investor O'Kane.
But Friedman of the University of Toronto said, ''Often consumers are wary of 'free' offers, knowing that one usually gets what one pays for. However, over the years investors have been conditioned to expect 'free' investment advice.''
AP-NY-05-25-99 2150EDT |
