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DON'T GET TANGLED IN FINANCIAL WEB SCHEMES.

BACK IN 1999, IT SEEMED IMPOSSIBLE TO READ A newspaper or watch TV without discovering investors striking it rich on the Internet. Among those thus tempted to get caught in the golden strands of the Web was Richard Beckwith, a probation officer with the Court Services Offender Supervision Agency for the District of Columbia in Washington, D.C., who invested in what was purported to be an Internet start-up. "It was a viable idea," says Beckwith. "In fact, there are companies out there now, doing what this company was supposed to do: take grocery orders online."

However, Beckwith managed to get ensnared in a web of deceit: His investment disappeared in what is alleged to be an investment fraud. "I lost $7,500," he says, "but others lost $20,000 or more, up to $60,000. What really hurt was that others lost money because they believed in me and my recommendations."

Beckwith and his fellow investors were victimized by other African Americans in what is known as an "affinity group" scam. "In an affinity fraud, the perpetrators say, `You can trust us because we're like you,'" says Susan Wyderko, director of the Securities and Exchange Commission's (SEC) office of investor education and assistance, of the practice in which scam artists use similarities in backgrounds and situations to capture prospective targets. "People become too trusting and wind up being tricked out of their money."

Even with the unraveling of many legitimate dotcoms in recent months, the promise of striking it rich with an Internet IPO still attracts investors, making it easier for scam artists to masquerade as legitimate entrepreneurs. At the same time, an array of fraudulent investment schemes have flooded cyberspace. For fraudulent promoters, reaching potential marks via e-mail is far more efficient and much cheaper than contacting them through old-fashioned telephone boiler rooms. "What used to require a network of professional promoters and brokers, banks of telephones, and months to accomplish can now be done in minutes by a single person using the Internet and a home computer," says Richard H. Walker, the SEC's director of enforcement.

According to the Internet Fraud Complaint Center in Fairmont, West Virginia (www.ifccfbi.gov), about 3,300 complaints regarding securities fraud were received from May to November 2000 in its first six months of operation. And countless other Net-based investment frauds go unreported.

SCAMS THAT CAN ENTANGLE YOU

The purpose of this article is not to make you pull money out of your portfolio and stuff it in your mattress. There are a number of viable investments out there--both inside and outside of the Web. What we are asking you to do is embrace the philosophy of caveat emptor--"let the buyer beware." Simply put, don't part with a single cent without conducting your due diligence.

So that you can be mindful of the predators out there, here's a list of some of the ways investors can get tangled up in a Web rife with fraudulent schemes:

* Affinity group fraud. Such scares are aimed at religious, ethnic, and professional groups by members of these groups or by persons claiming to provide assistance to these groups. "Advertising in the media that serve specific ethnic groups is used to identify potential victims," says Bill McDonald, assistant commissioner of enforcement at the California Department of Corporations, "often with offers of employment, training, or financial advice."

Affinity schemes also may involve face-to-face contacts. Reportedly, the Internet venture that attracted Beckwith began with an investment by an old friend and co-worker. The old friend received a statement showing that his money had doubled in a few weeks. Soon, more friends and acquaintances were being told about this incredible opportunity. "Someone you had known and trusted for years would tell you about this deal," says Beckwith. "You believed in that person so you believed it was legitimate. Everyone was reading how Internet companies were making people very wealthy in a short time period, so it all sounded plausible. Some people sold real estate to raise money [to] invest and others took money from college funds."

By the end of 1999, though, disquieting signs began to appear. Investors who wanted to take profits were discouraged by the promoter's talk of still greater future riches. Eventually, investors came to realize there were no profits and, apparently, no attempts to actually operate a business. "It doesn't look like anyone will get money back," says Beckwith. "What's more, I haven't been impressed by the efforts of the authorities to recover any assets or prosecute the perpetrators."

An assistant attorney general for the state of Maryland said "It's frustrating to people who have been victims of an investment fraud. They lose money and have nothing to show for it, not even the satisfaction of seeing the thief go to prison. Some white-collar crimes are very difficult to prosecute." The Maryland Attorney General's Office is currently investigating the scam that ensnared Beckwith and others.

* Currency scares. According to the California Department of Corporations, ethnic communities in particular have been targets of cons involving bogus investments in precious metals and foreign currencies. "Unscrupulous promoters rely on perceived opportunities in international investments to entice investors to speculate in questionable foreign currency investments, usually on unregulated or nonexistent foreign exchanges," says McDonald. "Typically, the promoter just steals all the money and no investments are actually made."

Echoing this complaint, William J. gainer, chairman of the federal Commodity Futures Trading Commission (CFTC), testified before the Senate Agriculture Committee that "abusive promoters have exploited regulatory gaps to sell foreign currency contracts to financially unsophisticated individuals, making exaggerated claims of profit opportunities and failing to disclose the risks of these inherently volatile instruments. Promoters often target senior citizens, recent arrivals [to] this country, and other vulnerable segments of society."

According to a Department of Corporations press release, in some currency scams, investors are encouraged by claims that currency trading is relatively low risk, legal, and profitable. Investors are not told, though, that high interest rates and commissions are being charged against their accounts Or that the promoters may be taking positions opposite to that of investors on each trade.

"Many foreign currency brokers set prices and take positions opposite to their customers," says McDonald, "making the opportunity for fraud readily available. Brokers frequently have no federal or state licenses and don't bother making any trades at all, but simply create fictitious account statements and steal the money. Those operating on the Internet may be using false identities and may be operating from anyplace in the world."

* Commodities con jobs. In one case, in September 2000, the CFTC brought a complaint against two investment professionals, asserting that they fraudulently advertised their commodity options trading methodology on their Website in order to lure money from investors. On this site, investors were told that these experts had placed successful trades for commodity options through certain brokers. In actuality, the perpetrators never held a commodity trading account. One ad boasted of turning $1,000 into $200,000 in one year, although this was not actual trading but, at best, hypothetical paper trading.

* Pump-and-dump ploys. The SEC's Wyderko says that this version of a classic fraud is perhaps the Internet's most prevalent investment scam. Here's how it works: First, shareholders and brokers who disseminate false information tout the price of a thinly traded stock Second, the con artists dump their overpriced shares at inflated prices, leaving come lately investors holding worthless bags. "The Internet makes it easier to spread rumors that a stock is ready to take off," says Wyderko. "Messages are posted at various sites around the Web, supposedly by many different people. However, you don't know who is doing these postings."

* In one such case, according to the California Department of Corporations, an investor posted items on a Yahoo! Finance message board using the name of Frank G. Mancuso, former chairman and CEO of Metro-Goldwyn-Mayer (MGM). The object was to affect the trading price of MGM stock, which the perpetrator bought and sold short, on different occasions.

* In another case, an employee of Pair-Gain Technologies put a link on a Yahoo! bulletin board to a Web page that appeared to be from Bloomberg, the noted financial news service, with a false report that the company was being taken over. The stock quickly moved up 32%, and then plummeted after the rumor was denied. The perpetrator, who owned the stock and hoped to turn a profit, had created a phony Web page to make his ruse more credible.

* Another Internet hoax involved Emulex Corp., a star of the tech-led bull market of 1998 to 1999 that was widely held by mutual funds. An investor, acting under a false name, prepared a press release announcing that the company was restating earnings, the CEO had resigned, and an SEC investigation was under way. None of the information was true. However, the press release was widely circulated online and Emulex's stock price fell by more than 50%, losing $2.2 billion in market capitalization within 16 minutes. Although the stock rebounded after the truth was revealed, those who sold at depressed prices lost money.

* A 14-year-old kid--Jonathan Lebed of Cedar Grove, New Jersey, reportedly pulled off the most startling cyberspace con job to date. According to the SEC, Lebed, whose exploits started in August 1999, would use his father's online brokerage account to buy a large block of stock in a small, thinly traded company such as Football USA or Havana Republic. Within hours, he would send hundreds of identical messages with baseless predictions to various Yahoo! Finance message boards, using multiple fictitious names to tout the stock he had just purchased. For example, he claimed in one of his messages that a company trading at $2 per share would be trading at more than $20 per share "very soon." On another occasion, he asserted that a stock would be the "next stock to gain 1,000%" and was "the most undervalued stock ever."

Other investors acted on these unsupported (and unfounded) rumors. "The posted messages always caused the price and volume of the touted stocks to increase dramatically," the SEC noted in its release. "On the day that Lebed sold his shares and realized his profit, the trading volume in the stock reached either record or near-record highs, in some cases reaching a 52-week high for both volume and price."

Lebed generally sold his shares within 24 hours, pocketing profits ranging from $11,000 to $74,000, from the price increases his messages had caused. In some instances, he placed an automatic sell order before the market closed on one day to ensure that he would not miss the price increase while he was in school the next day.

HOW YOU CAN PROTECT YOURSELF AGAINST SCAMS

Certainly, we have not seen The Last Great Internet Investment Hoax, so how can you protect yourself against online stock fraud? "Remember," says Wyderko, "whenever you read anything on the Internet where you don't really know who's sending you the message, check it out before acting."

That goes for online "investment newsletters" as well as for spare (unsolicited e-mail) and messages on Web bulletin boards. While legitimate online newsletters can provide valuable information, others are rip-off rags. Some companies pay cash or securities to the people who write bogus online newsletters as an incentive to tout their stocks. Federal securities laws require the newsletters to disclose such payments but many don't comply.

Some online newsletters make extravagant claims about all the research they do in order to bring you unbiased information; in the meantime, they're spreading false information or promoting worthless stocks. In fact, some of these non-newsletters actually "scalp" the stocks they hype, driving up the price of the stock with spurious recommendations and then selling their own positions for hefty profits. "It doesn't take a lot of money to put up a gorgeous Website," says Wyderko. "Scam artists know if they use certain words such as `trust' and `confidence' and `guarantee,' victims are more likely to believe them."

In one case, the SEC alleges that the publisher of a "free e-mail newsletter" claimed that his picks averaged a 410% increase after his recommendation. The "expert stock picker" was actually a school bus mechanic with no experience in the securities industry; he was selling his personal holdings of the touted stocks into the inflated market he had helped to create.

Does that mean you should never act on information gleaned from the Internet? Of course not. The Net can serve as a valuable resource for investors. However, you need to proceed cautiously.

A good place to start is with the "EDGAR" database on the SEC's site (www.sec.gov), which carries the required filings of most public companies. "Companies not listed on EDGAR are small and thinly traded," says Wyderko, "so you need to do extra research. Also, be sure to read the important information page about EDGAR on the Website."

One way to conduct extra research is to visit the site of the North American Securities Administrators Association (www.nasaa.org), the group that represents state securities regulators. There, you'll be able to get information about your state's regulatory agency and follow up on any company whose stock is offered for sale within your state. "Remember," says Wyderko, "that no one is immune [to] Internet investment fraud. The most successful, experienced, and intelligent people have been victimized. You always need to be vigilant when considering an investment, and that's particularly true if you're proceeding on information gleaned over the Internet."

Be careful of claims that sound too good to be true (they probably are). Remember the old Wall Street adage that bulls or bears may thrive, but pigs get slaughtered.

LOOK BEFORE LEAPING

Before you respond to any ratline, investment opportunities, the Federal Trade Commission says to look for these red flags:

"THIS INVESTMENT IS IRS APPROVED"

Don't believe it. The IRS does not "approve" investments for IRAs.

"OUR WEBSITE WILL MATCH YOU WITH INVESTMENT OPPORTUNITIES"

"Matchmaker" Websites offer to find investment opportunities that appeal to your unique interests. Make sure that you get detailed information about the company, be wary of any up-front fees, and keep your bank account information to yourself.

"OFFSHORE INVESTMENTS ARE TAX-FREE AND CONFIDENTIAL"

When the company behind the Website claims to be located offshore or offers an "offshore, tax-free" investment, get a second opinion from someone you trust--your attorney, financial advisor, or accountant--who is knowledgeable about the tax implications of "offshore" investments.

"SUBMIT YOUR FINANCIAL INFORMATION ONLINE"

Some Websites may ask you to submit personal financial information (income, bank account information, Social Security number) online to determine whether you're an "accredited investor." This may be a ploy to develop a "lead list" of potential investors Before you submit any personal information online, insist on reading the site's privacy policy.

TOP 10 LINES FROM PROMOTERS OF FRAUDULENT INVESTMENTS

Trying to figure out whether you're being scammed? Sometimes it takes a good ear. Here are the telltale lines that the Federal Trade Commission indicates can tip you off to potential schemes:

1 "We don't make money unless you make money."

2 "I know you get offers everyday from people who tell you they're going to make you rich. I can make it easy for you to make your decision based on actual facts."

3 "This opportunity is the best chance to make extra money for guys who work for a living ... guys like you and me."

4 "I've been in the business for 20 years, and I can tell you this: I know no other program that's legal, that's so easy to afford, and so easy to work that can bring in this kind of big money from such a small investment."

5 "I know this can work for you. I personally guarantee your success, right down to the last penny."

6 "Give me 1% of your trust I'll earn the other 99% when you see the return."

7 "Of course, there's a risk. There's a risk in everything."

8 "Sure, we could finance this venture ourselves. But we're trying to build a power base for the future with folks like you."

9 "We're talking about a cash cow here. But it's going fast. I need your check tomorrow at the latest."

10 "I can't be lying. There are laws against that."

SOURCE: FEDERAL TRADE COMMISSION
COPYRIGHT 2001 Earl G. Graves Publishing Co., Inc.
No portion of this article can be reproduced without the express written permission from the copyright holder.
Copyright 2001, Gale Group. All rights reserved. Gale Group is a Thomson Corporation Company.

 
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Author:KORN, DONALD JAY
Publication:Black Enterprise
Geographic Code:1USA
Date:Mar 1, 2001
Words:2723
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