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New unit fights 'Net fraud
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September 2, 1998: 5:04 p.m. ET
SEC starts division to investigate claims of online securities fraud
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NEW YORK (CNNfn) - The U.S. Securities and Exchange Commission is turning up the heat in its fight against online securities fraud.
The agency formed a special unit last month to investigate claims ranging from "pump and dump" scams to so-called "Ponzi schemes" on the Internet.
"We've got the greatest bull market in history and the greatest information revolution in history," said John Reed Stark, head of the new unit. "When you put those together, there are going to be scam artists who will take advantage of people."
It's difficult to assess the extent of online fraud, but it's definitely on the rise, Stark said. The SEC gets about 120 complaints a day and has imposed civil penalties in about 30 cases, he said.
Susan Grant, director of Internet Fraud Watch Program at the National Consumers League in Washington, D.C., thinks online fraud will be an even greater threat than telemarketing ruses.
"The Internet is an even easier way of reaching people than the telephone," Grant said. "We've really only seen the tip of the iceberg."
The National Consumers League is also expanding its capabilities to track online fraud, Grant said.
Starks, a former federal prosecutor, has been with the SEC for eight years. For the past three years he has chased Internet fraud. The agency decided to form a special unit, with a staff of three people, to meet the growing threat to investors.
Stark said he reads every complaint the SEC gets. His phone never stops ringing.
"It's the same old scam artists -- it's just a different medium," Stark said.
In a "pump and dump" scam, people try to generate interest in stocks on Internet message boards to inflate the prices. Once they "pump" up the stock, they "dump" their shares.
A "Ponzi" scheme lures people into believing they're putting their money in a great investment. The scam artist convinces people the investment is real by paying them money from the "profits." But the profits are really money from other duped investors.
The SEC, a civil law enforcement agency, can issue fines and seek injunctions.
In one recent case, a federal judge in Massachusetts froze assets and issued a restraining order against a group of people that allegedly sold more than $7 million in phony certificates of deposit to at least 185 investors in 14 states, including Massachusetts, Virginia, Illinois, and Indiana, according to the SEC.
The agency said the group used websites to convince unsophisticated investors -- including many elderly people -- to liquidate their annuities to buy the phony securities.
"The Internet is a new frontier for committing fraud," Stark said.
To protect yourself from getting stung, the SEC said you should use common sense. Go to a trusted adviser or friend before you invest.
"You wouldn't take a stranger's advise about a medical operation, would you?" Stark said.
Here are some other tips, according to the SEC:
- If you see an investment opportunity online, make sure you note the URL and the date and time you read about the offer. Print out a hard copy.
- Click here for a list of 10 questions you should ask about any investment opportunity.
- Check with state securities regulators and the SEC to find out if they've received any complaints about the company. Click here for a list of the SEC's directory of state securities regulators.
- Find out from the online promoter where a company is incorporated. Call the Secretary of the State's office in the state to find out more information about the company.
- Keep in mind that you can get a range of useful information about a company's credit report, lawsuits, liens and judgments at your local library.
- Remember that anyone can set up a website, and what you read might not be true.
- Before you invest, always get financial information like a prospectus in writing.
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