Regulators Crack Down on ‘Cyberfraud’ : Computers: Three states announce actions directed at suspicious solicitations made on line.
Warning that fast-growing computer bulletin boards are becoming infested with financial scammers, state regulators issued an unusual alarm to investors Thursday and began a crackdown on the newest form of con artistry: “cyberfraud.”
Missouri, New Jersey and Texas announced investigations and enforcement actions directed at individuals who solicit money for dubious or fraudulent investments through the financial bulletin boards of on-line services such as Prodigy, America Online and CompuServe.
Craig A. Goettsch, president of the North American Securities Administrators Assn., the organization of state regulators, said at a Washington news conference that the warning and crackdown are needed to prevent the bulletin boards from being “discredited as a haven for fast-buck artists.”
The action also represents an effort by state regulators to assert jurisdiction over financial solicitations on the bulletin boards, even if the messages are posted from other states or countries. The Securities and Exchange Commission enforcement staff confirmed Thursday that the federal agency is also looking into the issue.
Bulletin boards such as Prodigy’s “Money Talk” and America Online’s “Investors Network” are electronic forums in which subscribers can post notes and exchange information about stocks and other investments. They have become popular among small investors who have home computers.
Prodigy, for example, says its bulletin board for financial topics is one of its most popular, with as many as 5,000 messages and replies posted daily. Regulators say penny-stock scammers have moved onto the bulletin boards, hyping thinly traded low-priced stocks by posting notes with wildly inflated claims about the companies’ prospects.
The messages are often heavy with exclamation points and capital letters, claim inside knowledge of recent developments and assert that the stock price will rocket once the information becomes public. Enough bulletin board users are taken in, regulators say, to drive up prices and enable the scammers to reap a quick profit. Typically, the stocks’ prices collapse soon afterward.
The regulators issued a 10-page “Investor Bulletin” on Thursday warning bulletin board users to be wary of messages claiming inside knowledge of major developments at companies. They also provided examples of solicitations for nonexistent mutual funds and of illegal electronic chain letters.
Brian Ek, a spokesman for Prodigy, denied Thursday that the problem is widespread and said the company has received no complaints from subscribers. A spokeswoman for America Online said that service has not received complaints either.
The on-line services say they are cooperating with regulators but are not equipped to police the thousands of messages posted daily. They also say it is not a proper role for service operators to limit the free flow of communication, although on-line services often censor sexually explicit or politically offensive messages.
Whether electronic services can or should be responsible for messages transmitted over their networks is a hotly debated issue in the computer world.
In an enforcement action announced Thursday, Missouri Securities Commissioner John R. Perkins issued a civil cease-and-desist order against ETC Industries Inc., a Vancouver, Canada,British Columbia, company that says it is developing an electric car, and its president.
Missouri said that on April 13, an individual giving his name as K. Sean Liebscher posted a message on Prodigy under the heading “$.35 moving to $2.00.” The note said ETC had developed a prototype electric car that could go faster than 90 m.p.h., to be marketed by summer. The note said the company expected to make a $1-million profit the first year and that it was “stock undiscovered at 3/8 and Prime for Breakout!! This is an excellent opportunity to get in on the ground floor for an industry ready to EXPLODE!!” It predicted that the stock would soon zoom to $2.40 per share.
Only days later, after other bulletin board users accused him of having a vested interest in the company, did Liebscher acknowledge in another posting that he was a shareholder and that his father was president of the company. Missouri said it took action because ETC’s shares were not registered for sale in the state and therefore the initial message represented an illegal solicitation to invest.
K. Sean Liebscher, ETC president, characterized his son’s actions as “no big deal” and denied that the messages constituted a solicitation to invest. He added: “If they ask us to cease and desist, we will. We’re not really doing anything.”
