Types of Internet Investment Frauds

The Securities Exchange Commission (SEC), in late 2005, issued an Investor Alert about Internet investment scams. These types of fraud and securities thefts continue to climb and new scams or schemes surface frequently. Online investment frauds are similar to frauds perpetrated through the mail or over the phone, although they are more difficult to detect.

The following categories of Internet investment frauds were released as an alert to the individuals. The specific schemes usually fall into one of the following categories:

“Pump and Dump” Scams

This is where all the e-mail messages are sent urging people to buy a stock quickly, based on an economic development or a future company. The senders of the message may be paid promoters or company insiders who gain by selling their shares after the unsuspecting investors “pump up” the stock price.

Pyramid Schemes

These are the schemes where the promoters claim that they can turn a small investment into a larger investment within a short span of time, but that the investment requires more participants for it to increase. The fraudsters then actually make money merely by recruiting new participants into the program and then the investment is lost.

“Risk-free” or “Guaranteed” Investments

Often these are the investments with those exotic-sounding types of components. There are not any “guaranteed” or “risk-free” investments. These investments should be viewed very suspiciously.

“Inside information”

At times an individual or a group of people may claim to have the non-public or inside information about a product or company and that this information will soon send the stock price soaring. This information is generally not true and it is designed to make people to invest in a particular product they generally would never buy. Trading on actual “inside information” is a violation of the federal securities laws.

“Off-shore”

These deceptive investment schemes are mostly generated from other countries and target the U.S. investors. These foreign frauds are usually difficult for U.S. law enforcement agencies to rectify or investigate and investors should be very skeptical of these schemes.

Direct Frauds

Investors are asked in these schemes for money up-front and are generally promised huge returns on a relatively small investment. Some direct fraud schemes solicit the investments that send the investors to a disguised account which is non-existent and others then direct to legitimate accounts which are then quickly re directed to accounts which are out of the country.

False Promises of Pending Initial Public Offerings (IPO’s)

These schemes claim to announce SEC-approved IPO which is upcoming and to raise money by fraud means by offering “free stock” credits if at all the investor pays an administrative fee. After paying the fee, the investor is informed that they can redeem their stock credits for the common stock when the company completes the IPO. In truth, the company did not file for an IPO and the SEC has not approved the offering.

If the investment decision is based solely on the information which is gathered from the Internet investors the investors should particularly check with a number of regulatory entities, before making any type of investment. Potential investors should check with the SEC, with the Central Registration Depository (CRD) and with state securities regulators. The CRD can inform a potential investor whether the broker’s firm or the broker has a disciplinary history. They are also able to identify whether the offering has been cleared for sale in the resident state or not. In addition, the NASD tracks the disciplinary histories of firms and brokers.

The second most common Internet fraud prevalent is investment fraud. Recent statistics show that Internet investment fraud amounts to losses of over $10 billion per year and is still growing. If an individual believes that he/she has been the victim of one of these types of crimes, a knowledgeable securities attorney may be able to assist in the recovery of the losses suffered.