Old Scam, New Tool
The Internet may be a new frontier, but users are often targets for age-old scams. Take stock fraud. The Securities and Exchange Commission has cracked down on 44 individuals and companies that used computer bulletin boards, online newsletters and investment Web sites to illegally promote stocks. It is the biggest SEC action ever taken against online operators, but the agency has barely scratched the surface of this problem.
Much of the fraud in the SEC cases involved “boiler room” operators. In the past, these operations had to rely on phone calls or the mail to snag customers for their “investment advice.” With the coming of the Internet, they have a new ease of access to a huge numbers of potential investors.
The SEC alleged that many of the companies and individuals--five of them operating in Southern California--portrayed themselves as objective analysts, sometimes spreading falsely positive rumors about stocks in which they had financial interests. Some who gave true information about companies failed to fully disclose that they had been paid or received stock.
Companies may legally pay promoters to push their stocks, but federal law requires the promoters to disclose such compensation in detail. The SEC said the 44 received more than $6.3 million and nearly 2 million shares of stock and options from the 235 companies they represented.
The SEC does not have the authority to shut down a Web site. It secured cease-and-desist orders against some operators and fines in 13 cases. In others it has filed suits in federal court or has cease-and-desist orders pending.
The vast and anonymous nature of the Internet is attractive to unscrupulous operators. Regulators repeatedly caution investors, especially small ones, to be wary of what they find on the Internet. Informal efforts are underway to develop a clearinghouse for Internet users to report potential stock fraud. That may not be enough. The SEC sees a growing problem, and Congress may need to give the agency more resources to squelch these frauds.
