Online Investment Fraud:
New Medium, Same Old Scam

The types of investment fraud seen online mirror the frauds perpetrated over the phone or through the mail. Remember that fraudsters can use a variety of Internet tools to spread false information, including bulletin boards, online newsletters, spam, or chat (including Internet Relay Chat or Web Page Chat). They can also build a glitzy, sophisticated web page. All of these tools cost very little money and can be found at the fingertips of fraudsters.

Consider all offers with skepticism. Investment frauds usually fit one of the following categories:

The "Pump And Dump" Scam

It's common to see messages posted online that urge readers to buy a stock quickly or tell you to sell before the price goes down. Often the writers will claim to have "inside" information about an impending development or to use an "infallible" combination of economic and stock market data to pick stocks. In reality, they may be insiders or paid promoters who stand to gain by selling their shares after the stock price is pumped up by gullible investors. Once these fraudsters sell their shares and stop hyping the stock, the price typically falls and investors lose their money. Fraudsters frequently use this ploy with small, thinly-traded companies because it's easier to manipulate a stock when there's little or no information available about the company.

The Pyramid

Be wary of messages that read: "How To Make Big Money From Your Home Computer!!!" One online promoter claimed that investors could "turn $5 into $60,000 in just three to six weeks." In reality, this program was nothing more than an electronic version of the classic "pyramid" scheme in which participants attempt to make money solely by recruiting new participants into the program.

The "Risk-Free" Fraud

"Exciting, Low-Risk Investment Opportunities" to participate in exotic-sounding investments – such as wireless cable projects, prime bank securities, and eel farms – have been offered through the Internet. But no investment is risk-free. And sometimes the investment products touted do not even exist – they're merely scams. Be wary of opportunities that promise spectacular profits or "guaranteed" returns. If the deal sounds too good to be true, then it probably is.

Off-shore Frauds

At one time, off-shore schemes targeting U.S. investors cost a great deal of money and were difficult to carry out. Conflicting time zones, differing currencies, and the high costs of international telephone calls and overnight mailings made it difficult for fraudsters to prey on U.S. residents. But the Internet has removed those obstacles. Be extra careful when considering any investment opportunity that comes from another country, because it's difficult for U.S. law enforcement agencies to investigate and prosecute foreign frauds.

The SEC Is Tracking Fraud

The SEC actively investigates allegations of Internet investment fraud and, in many cases, has taken quick action to stop scams. We've also coordinated with federal and state criminal authorities to put Internet fraudsters in jail. Here's a sampling of recent cases in which the SEC took action to fight Internet fraud:

Francis A. Tribble and Sloane Fitzgerald, Inc. sent more than six million unsolicited e-mails, built bogus web sites, and distributed an online newsletter over a ten-month period to promote two small, thinly traded "microcap" companies. Because they failed to tell investors that the companies they were touting had agreed to pay them in cash and securities, the SEC sued both Tribble and Sloane to stop them from violating the law again and imposed a $15,000 penalty on Tribble. Their massive spamming campaign triggered the largest number of complaints to the SEC's online Enforcement Complaint Center.

Charles O. Huttoe and twelve other defendants secretly distributed to friends and family nearly 42 million shares of Systems of Excellence Inc., known by its ticker symbol "SEXI." Huttoe drove up the price of SEXI shares through false press releases claiming non-existent multi-million dollar sales, an acquisition that had not occurred, and revenue projections that had no basis in reality. He also bribed co-defendant SGA Goldstar to tout SEXI to subscribers of SGA Goldstar's online "Whisper Stocks" newsletter. The SEC obtained court orders freezing Huttoe's assets and those of various others who participated in the scheme or who received fraud proceeds. Six people, including Huttoe and Theodore R. Melcher, Jr., the author of the online newsletter, were also convicted of criminal violations. Both Huttoe and Melcher were sentenced to federal prison. The SEC has thus far recovered approximately $11 million in illegal profits from the various defendants.

Matthew Bowin recruited investors for his company, Interactive Products and Services, in a direct public offering done entirely over the Internet. He raised $190,000 from 150 investors. But instead of using the money to build the company, Bowin pocketed the proceeds and bought groceries and stereo equipment. The SEC sued Bowin in a civil case, and the Santa Cruz, CA District Attorney's Office prosecuted him criminally. He was convicted of 54 felony counts and sentenced to 10 years in jail.

IVT Systems solicited investments to finance the construction of an ethanol plant in the Dominican Republic. The Internet solicitations promised a return of 50% or more with no reasonable basis for the prediction. Their literature contained lies about contracts with well known companies and omitted other important information for investors. After the SEC filed a complaint, they agreed to stop breaking the law.

Gene Block and Renate Haag were caught offering "prime bank" securities, a type of security that doesn't even exist. They collected over $3.5 million by promising to double investors' money in four months. The SEC has frozen their assets and stopped them from continuing their fraud.

Daniel Odulo was stopped from soliciting investors for a proposed eel farm. Odulo promised investors a "whopping 20% return," claiming that the investment was "low risk." When he was caught by the SEC, he consented to the court order stopping him from breaking the securities laws.