SECURITIES FRAUD LOOMS
By Jim Fuller
A business partnership made up of U.S. and German promoters
offers investors on the Internet what seems like a good deal --
an opportunity to buy shares in a new, fast-growing company that
promises returns of up to 420 percent annually. The partnership
raises over $1 million by telling investors that their initial
investments are backed by a major bank and guaranteed against
loss. Unfortunately, no such bank exists, and the organizers of
the scam are prosecuted and ordered to repay investors.
According to an official of the U.S. Securities and Exchange
Commission (SEC), cases of securities law violations like this
are increasing in frequency as Internet usage swells and an
increasing number of people use the medium to purchase securities
and make investments.
A recent survey reports that the number of U.S. households with
access to the Internet more than doubled to 14.7 million in 1996.
The explosive growth in Internet usage has also created fantastic
opportunities in the areas of securities, investments, and
commerce. Investors can communicate with almost every
conceivable market participant and find libraries of information
about companies -- all at little cost, and from the comfort of
their own homes.
Forrester Research, a Cambridge, Massachusetts, consulting firm,
predicts that the number of online accounts will grow from 1.5
million in 1996 to 10 million in 2001. According to the American
Association of Individual Investors, 33 brokerage firms now offer
some form of online trading, up from only 12 in 1995.
However, John Reed Stark, special counsel for Internet projects
at the SEC's Division of Enforcement, said in a interview that
the dramatic growth in online investing has a dark side to it --
crooks and thieves looking for opportunities to rip-off
unsuspecting investors.
"In light of the wide range of largely unregistered investment
opportunities offered over the Internet, the SEC is well aware of
the use of the Web as a convenient means for scam artists to
steal from investors," Stark said. "The SEC has brought a host
of cases thus far involving offerings over the Internet."
At very little cost and from the privacy of a basement office or
living room, a fraudster can produce a home page that looks
better than that of a Fortune 500 company. Thieves can even
provide a link to the home page of the SEC next to a
representation that a particular security has received "approval"
from the SEC.
Or a scam artist, called a "spammer" in this case, can pull a
list of users from newsgroups catering to investors, send them
the latest news about the "hottest" new investment, and direct
them to a Web site or to a toll-free telephone number. In this
way, with very little effort of time or money, the scam artist
can reach an unlimited number of potential victims. Spammers
combine the skills of mass mailers with the hard-pressure sales
tactics of telephone pitchmen.
"Internet spammers have free rein to send information about bogus
investment products to anyone with a modem, whether they like it
or not," Stark said. "While there's no way to physically stop
them from doing this, we can still prosecute them and shut down
their Web sites."
Or a swindler might intercept the E-mail of an official of a
public company, alter it by adding false information, and send it
on to millions of people instantly in an attempt to manipulate
the price of a stock.
"Like cat burglars who creep in without ever being seen, stock
manipulators can steal an identity and make it their own, only
the cyber-cat burglars need not climb up the drain pipe for a
break-in or even don ski masks to hide their identities," Stark
said.
Stark said that the biggest concern right now are financial
services offered over the Internet by foreign brokers, dealers,
and investment advisers because they are so difficult to
prosecute. Working from their home countries, foreign
broker-dealers can vend their services to U.S. investors without
ever crossing a border. While their activities may be legitimate
in their own countries, they often violate strict registration
and other provisions of the U.S. Securities Exchange Act.
"The entire area has become a massive can of worms," Stark said.
"Given the many problems associated with investigating and
prosecuting offshore entities, from serving subpoenas to locating
assets to extradition, international authorities must work
together, using present treaties, memoranda of understanding, and
other formal and informal international agreements."
As for what the SEC is doing to protect Internet investors, Stark
is quick to point out that the commission has sought no new
statutes, regulations, or rules to catch and prosecute those who
commit Internet securities violations, and that Congressional
intervention appears unnecessary.
"The swindles over the Internet are no different from the
confidence games of the past," he said. "The only difference is
the medium. Thus, present antifraud weapons will more than
suffice. For instance, the antifraud provisions of the
Securities and Exchange Act of 1934 would apply to any fraudulent
communication over the Internet, just as they apply to any
information communicated on paper, or over the radio or
television."
To track down the scam artists, the SEC uses a multifaceted
approach that includes surveillance, education, and self-policing
by individual Internet users. As part of its surveillance
effort, Stark's division at the SEC employs the latest browsing
software for viewing the Internet together with powerful hardware
such as Pentium processors. The SEC also recently formed the
"Cyberforce," a group of volunteers who spend several hours each
week "surfing" the Web in search of securities law violations.
Stark's division has also set up a Website called the
"Enforcement Complaint Center" -- located as a link on the SEC
home page -- allowing Internet users to contact the SEC directly
if they suspect wrongdoing. The site receives about 50 messages
a day -- more than 75 percent of which are useful for SEC
investigations or referrals. The Enforcement Complaint Center
can be found at the following Internet address:
http://www.sec.gov/enforce/comctr.htm.
"There exists a remarkable Internet culture of self-policing by
individual users who resent the intrusion of the crooks and
thieves trying to exploit the Internet," Stark said. "The
division hopes to tap into this culture, encouraging users to
report dubious offerings on the Web."
In the area of education, the SEC publishes the so-called
Investor Alert, which contains an analysis of the types of online
investment fraud and abuse together with suggestions for
investors on how to avoid becoming the next victim. The alert
even provides a checklist of steps to follow before making an
investment over the Internet.
The SEC has also set up an online database, called Edgar
(http://www.sec.gov/edgarhp.htm), which provides the quarterly
reports and management statements of companies, and is updated
daily. The SEC hopes that Edgar will help reduce the
manipulation of share prices by giving investors access to the
latest information.
Given the breadth of illicit activities on the Internet, Stark's
division coordinates its policing efforts with other law
enforcement agencies, including the U.S. Department of Justice,
the Federal Bureau of Investigation, the Federal Communications
Commission, the Federal Trade Commission, and a range of other
civil and criminal law enforcement authorities.
Last December, the SEC teamed up with three other federal
agencies and local law enforcement officials from 24 states to
sponsor "Surf Day," which resulted in the identification of more
than 500 possible cyberscams.
According to Stark, companies involved in offering or trading
securities over the Internet must provide the same customer
protections often taken for granted in the traditional trading of
securities, such as with a registered U.S. exchange. These
protections should mandate: (1) that investors' funds and
securities are handled appropriately; (2) that investors
understand the risks involved in purchasing the often illiquid
and speculative securities that are traded over the Internet; (3)
that buyers be made aware of the last sale prices on a particular
stock; and (4) that companies provide on-going and adequate
disclosure.
__________
Jim Fuller writes on information technology and other global
issues for the United States Information Agency.
|
