INTERNET PROVES HANDY AS MARKET TOOL, BUT DON'T IGNORE DANGERS.

Byline: Yardena Arar and Dawn Yoshitake Daily News Staff Writers

America Online has its critics, both on-line and off. But the caveat in a recent Iomega Corp. Securities and Exchange Commission filing was, by all accounts, an on-line industry first.

Iomega's December S-3 registration statement for an upcoming secondary offering listed discussions on AOL bulletin boards as a risk factor under the heading "Stock Market Volatility."

"The Company believes that electronic bulletin board postings regarding the Company on America Online and other similar services, certain of which have in the past contained false information about Company developments, including quotes falsely attributed to executive officers of the Company, have in the past and may in the future contribute to volatility in the market price of the Common Stock," the statement read.

The mention speaks to at least one company's recognition of the potential of on-line investment communities to affect the stock market. But Iomega analyst Cliff Josephy of H.D. Brous in Great Neck, N.Y., expects that this won't be the last warning of its kind.

"That language will probably become boilerplate, eventually," Josephy said.

The advent of the information superhighway may be a boon to the individual investor, but like any venue where little fish congregate, it is also attracting a few sharks.

The ability to reach a vast worldwide audience coupled with the ease of maintaining anonymity make cyberspace a natural for con artists, said Gary Sundick, associate director with the Securities and Exchange Commission's enforcement division.

"The kinds of fraud that we're seeing are schemes we saw long before the Internet - unregistered securities, get-rich-quick schemes, guarantees of rapid increase in value of whatever you're purchasing with little risk."

So far, the SEC investigations of on-line scams that have resulted in prosecutions involve flaky business deals and pyramid schemes - an eel farm venture, a telephone lottery and the like. But Sundick sees a definite potential for stock manipulation, especially low-priced "penny stock" securities.

"The problem that is maybe unique to the Internet is that you're not really sure who's putting out these messages. If someone says XYZ Mining Co. is going to find gold and the price will go from 20 to 30, you don't know whether it's a broker, someone with an interest in the firm, or what."

"Online stock hyping is more dangerous than traditional means," said David Gardner, co-founder of The Motley Fool, an investment newsletter that has spawned a hugely successful financial information site on America Online.

"You can reach more people than a boiler room technique and people are more trusting because the information looks more official when its typed up.

"It's not difficult to get a following," he added. "There are a lot of people looking for financial advice and it's not that difficult to come on-line and say, 'I'm a pro' and get some people to believe you."

On-line stock boards can be particularly effective tools for manipulating thinly traded stocks, Gardner added.

"Ringleaders can buy a stock on Friday, tout it on a Web page or board during the weekend and know people will buy it on Monday while they sell their shares. It can be timed out better than relying on people to respond to phone calls or mail."

The SEC tries to monitor on-line investment activity, but the sheer volume of traffic makes close scrutiny difficult. State regulators in the North American Securities Administrators Association are also concerned and have established an Offerings on the Internet Committee to monitor the situation.

"There are probably 10 or 15 of us that peek and poke around various addresses and various groups, but there is no way to monitor with any efficiency everything that's out there on the bulletin boards or the Net," said North Carolina securities investigator Ben Lewis, chairman of the Internet committee.

"It's like looking for the proverbial needle in the haystack, except you're looking at four or five haystacks."

It's not uncommon for contributors whose posts are deemed suspect to simply vanish, Gardner said.

"Although the boards are susceptible to hucksterism, they have a memory and can be referred to months later. The people who survive are the ones who give good advice."

Lewis and Sundick urge prospective investors to exercise common sense in evaluating information they get on-line.

"The advice that we give people is they should not make any investment decision based solely on what they see on the Internet or commercial on-line service," Sundick said.

He recommended examining conventional documentation - SEC filings, for example - before making an investment, even if it means waiting a few days.

"Time is never really that crucial with a legitimate investment," he said.

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PHOTO

Photo Anonymity presents credibility problems on-line, thus the potential for misleading naive investors.