Online Investment Fraud

The types of investment fraud seen online mirror the frauds perpetrated over the phone or through the mail. Remember that fraudsters can use a variety of Internet tools to spread false information, including bulletin boards, online newsletters, spam, or chat (including Internet Relay Chat or Web Page Chat). They can also build a glitzy, sophisticated web page. All of these tools cost very little money and can be found at the fingertips of fraudsters.

Consider all offers with skepticism. Investment frauds usually fit one of the following categories:

The "Pump And Dump" Scam
It's common to see messages posted online that urge readers to buy a stock quickly or tell you to sell before the price goes down. Often the writers will claim to have "inside" information about an impending development or to use an "infallible" combination of economic and stock market data to pick stocks. In reality, they may be insiders or paid promoters who stand to gain by selling their shares after the stock price is pumped up by gullible investors. Once these fraudsters sell their shares and stop hyping the stock, the price typically falls and investors lose their money. Fraudsters frequently use this ploy with small, thinly-traded companies because it's easier to manipulate a stock when there's little or no information available about the company.

The Pyramid
Be wary of messages that read: "How To Make Big Money From Your Home Computer!!!" One online promoter claimed that investors could "turn $5 into $60,000 in just three to six weeks." In reality, this program was nothing more than an electronic version of the classic "pyramid" scheme in which participants attempt to make money solely by recruiting new participants into the program.

The "Risk-Free" Fraud
"Exciting, Low-Risk Investment Opportunities" to participate in exotic-sounding investments – such as wireless cable projects, prime bank securities, and eel farms – have been offered through the Internet. But no investment is risk-free. And sometimes the investment products touted do not even exist – they're merely scams. Be wary of opportunities that promise spectacular profits or "guaranteed" returns. If the deal sounds too good to be true, then it probably is.

Off-shore Frauds
At one time, off-shore schemes targeting U.S. investors cost a great deal of money and were difficult to carry out. Conflicting time zones, differing currencies, and the high costs of international telephone calls and overnight mailings made it difficult for fraudsters to prey on U.S. residents. But the Internet has removed those obstacles. Be extra careful when considering any investment opportunity that comes from another country, because it's difficult for U.S. law enforcement agencies to investigate and prosecute foreign frauds.

The SEC Is Tracking Fraud
The SEC actively investigates allegations of Internet investment fraud and, in many cases, has taken quick action to stop scams. We've also coordinated with federal and state criminal authorities to put Internet fraudsters in jail. Here's a sampling of recent cases in which the SEC took action to fight Internet fraud:

Francis A. Tribble and Sloane Fitzgerald, Inc. sent more than six million unsolicited e-mails, built bogus web sites, and distributed an online newsletter over a ten-month period to promote two small, thinly traded "microcap" companies. Because they failed to tell investors that the companies they were touting had agreed to pay them in cash and securities, the SEC sued both Tribble and Sloane to stop them from violating the law again and imposed a $15,000 penalty on Tribble. Their massive spamming campaign triggered the largest number of complaints to the SEC's online Enforcement Complaint Center.

Charles O. Huttoe and twelve other defendants secretly distributed to friends and family nearly 42 million shares of Systems of Excellence Inc., known by its ticker symbol "SEXI." Huttoe drove up the price of SEXI shares through false press releases claiming non-existent multi-million dollar sales, an acquisition that had not occurred, and revenue projections that had no basis in reality. He also bribed co-defendant SGA Goldstar to tout SEXI to subscribers of SGA Goldstar's online "Whisper Stocks" newsletter. The SEC obtained court orders freezing Huttoe's assets and those of various others who participated in the scheme or who received fraud proceeds. Six people, including Huttoe and Theodore R. Melcher, Jr., the author of the online newsletter, were also convicted of criminal violations. Both Huttoe and Melcher were sentenced to federal prison. The SEC has thus far recovered approximately $11 million in illegal profits from the various defendants.

Matthew Bowin recruited investors for his company, Interactive Products and Services, in a direct public offering done entirely over the Internet. He raised $190,000 from 150 investors. But instead of using the money to build the company, Bowin pocketed the proceeds and bought groceries and stereo equipment. The SEC sued Bowin in a civil case, and the Santa Cruz, CA District Attorney's Office prosecuted him criminally. He was convicted of 54 felony counts and sentenced to 10 years in jail.

IVT Systems 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.

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.

Investment Fraud

Internet Fraud: How to Avoid Internet Investment Scams
The Internet serves as an excellent tool for investors, allowing them to easily and inexpensively research investment opportunities. But the Internet is also an excellent tool for fraudsters. That's why you should always think twice before you invest your money in any opportunity you learn about through the Internet.

This alert tells you how to spot different types of Internet fraud, what the SEC is doing to fight Internet investment scams, and how to use the Internet to invest wisely.

Navigating the Frontier: Where the Frauds Are
The Internet allows individuals or companies to communicate with a large audience without spending a lot of time, effort, or money. Anyone can reach tens of thousands of people by building an Internet web site, posting a message on an online bulletin board, entering a discussion in a live "chat" room, or sending mass e-mails. It's easy for fraudsters to make their messages look real and credible. But it's nearly impossible for investors to tell the difference between fact and fiction.

Online Investment Newsletters
Hundreds of online investment newsletters have appeared on the Internet in recent years. Many offer investors seemingly unbiased information free of charge about featured companies or recommending "stock picks of the month." While legitimate online newsletters can help investors gather valuable information, some online newsletters are tools for fraud.

Some companies pay the people who write online newsletters cash or securities to "tout" or recommend their stocks. While this isn't illegal, the federal securities laws require the newsletters to disclose who paid them, the amount, and the type of payment. But many fraudsters fail to do so. Instead, they'll lie about the payments they received, their independence, their so-called research, and their track records. Their newsletters masquerade as sources of unbiased information, when in fact they stand to profit handsomely if they convince investors to buy or sell particular stocks.

Bulletin Boards
Online bulletin boards – whether newsgroups, usenet, or web-based bulletin boards – have become an increasingly popular forum for investors to share information. Bulletin boards typically feature "threads" made up of numerous messages on various investment opportunities.

While some messages may be true, many turn out to be bogus – or even scams. Fraudsters often pump up a company or pretend to reveal "inside" information about upcoming announcements, new products, or lucrative contracts.

Also, you never know for certain who you're dealing with – or whether they're credible – because many bulletin boards allow users to hide their identity behind multiple aliases. People claiming to be unbiased observers who've carefully researched the company may actually be company insiders, large shareholders, or paid promoters. A single person can easily create the illusion of widespread interest in a small, thinly-traded stock by posting a series of messages under various aliases.

E-mail Spams
Because "spam" – junk e-mail – is so cheap and easy to create, fraudsters increasingly use it to find investors for bogus investment schemes or to spread false information about a company. Spam allows the unscrupulous to target many more potential investors than cold calling or mass mailing. Using a bulk e-mail program, spammers can send personalized messages to thousands and even millions of Internet users at a time.