Internet Fraud on the Rise
An investor was issued an alert about the rise of Internet investment scams, by the Securities Exchange Commission (SEC), in late 2005. As it is difficult for potential investors to identify the authenticity and validity of information on the Internet, these types of securities fraud and thefts continue to climb. Websites and other sources present on the Internet can be easily created by thieves and they often look “real”. As software programs and technology become more sophisticated, these sites will be even more common and their demands will increase.
The Office of Internet Enforcement was created by the SEC and it was specifically designed to fight Internet theft/fraud, including investment schemes. It is required by the SEC that all online communications which recommend stocks disclose the entity or the person who paid for the communication, including the amount and type of the payment. The SEC has brought many enforcement cases especially in the past ten years which involve violations of this law and are regarding financial investments or securities.
There are thousands of online chat rooms, online investment newsletters, online bulletin boards, knowledge areas and investment groups on the Internet which offer information to the investors. Many of these offer the investors what appears to be unbiased information which is free of charge about featured companies or the site may recommend the stock picks of the month. Some companies pay the people to write online financial newsletters to recommend or “tout” their stocks. It is required by the federal securities law that the newsletters disclose who paid them along with the type and amount of the payment even though this is not illegal. Many fraudsters fail to do this and are dishonest about their independence, the so-called research performed, the payments and their records of accomplishment. These newsletters are often masqueraded as sources of unbiased information, when actually there is a profit if the scam artists convince the investors to sell or buy the particular stocks they represent.
The thieves “scalp” the stocks they publicize, in some of the worst cases and they drive up the prices of the stocks with baseless recommendations. The thieves then sell their own holdings at high prices in order to earn big profits. The investors generally always lose and the thieves always profit. There are some legitimate online newsletters which can help the investors to gather valuable information on financial investment, but the majority of the online newsletters are tools for fraud. They are being used in a wrong way. Before following any of the advice provided in the newsletter, it is important to check the credentials of the company that “owns” the newsletter.
Another popular forum for investors to share information is online bulletin boards. They are becoming very common these days. Bulletin boards typically feature those threads which are made up of numerous messages on various investment opportunities. Fraudsters often reveal “inside” information or pump up a company about new products, lucrative contracts and upcoming announcements. In addition, people who claim to be unbiased observers and who have carefully researched the company are sometimes, large shareholders, company insiders, or paid promoters. It is easy to create the illusion of widespread interest in a traded stock by a single person by posting a series of messages which are under various aliases.
Individuals should never make an investment which is solely based upon information in a bulletin board, an online newsletter, posting or email. This is even more critical if the investment involves a thinly, small traded company or a company which does not file regular reports with the SEC.
Federal securities laws require most of the public companies to register with the SEC and also to file annual reports which contain audited financial statements. This includes all the U.S. companies with more than 500 investors and $10 million in net assets and all those companies which list their securities on the NASDAQ Stock Market or a major national stock exchange such as the New York Stock Exchange.
Some companies do not have to register their file reports or securities. These include those companies which are raising less than $5 million in a period of 12-months. They must file a hard copy of the “offering circular” with the SEC which contains financial statements and other information. In addition, the smaller companies which are raising less than one million dollars and who do not have to register with the SEC, must file a brief notice which includes the names and addresses of stock promoters and owners.
The FBI’s Internet Fraud Complaint Center (IFCC) is a joint project with the Department of Justice (DOJ) and it has recently reported that most of the Internet fraud complaints stem from online auctions. But, the second most common Internet fraud was investment fraud. Recent statistics approximate that Internet investment fraud amounts to losses of over $10 billion per year.
The SEC actively investigates allegations of Internet investment fraud and is currently working to accelerate their time line in stopping these types of thefts and frauds. The SEC coordinates with federal and state criminal authorities to prosecute Internet fraudsters and to help individuals recover losses. Securities attorneys can assist investors who have been the victim of Internet financial crimes and help to increase their chance of recovering financial investments.