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
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.
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.
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
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.