On-Line Investment Schemes: Fraud in Cyberspace
Unwary investors are in danger today of being taken for a ride on the information superhighway. State securities regulators around the United States are concerned about the explosion in illicit investment schemes now flourishing on commercial bulletin board services (such as Prodigy, America Online, and Compuserve) and the informal web of computer networks that make up the Internet. An estimated four million U.S. households that already have access to the major on-line services are being exposed to hundreds of fraudulent and abusive investment schemes, including stock manipulations, pyramid scams, and Ponzi schemes.
The investment fraud problem could reach epidemic levels over the next few years as several million newcomers crowd onto the once lightly traveled information superhighway.
The Missouri Securities Division and the New Jersey Bureau of Securities announced on June 30 the first regulatory actions taken in the United States against on-line investment schemes. At least three other states currently have investigations underway involving suspected investment fraud and abuse in cyberspace. Highlights of these and other key developments in known or suspected abuses follow:
* According to a cease-and-desist order filed on June 30 by the Missouri Securities Division, a stockbroker unlicensed to do business in Missouri touted his own services and made dubious claims for stocks not registered for sale in the state. The broker identified himself on one of the largest commercial on-line services in the United States as "A Good Trader." In the on-line messages, the broker included his "800" telephone number and an offer to provide more information by e-mail or regular mail. In an effort to entice customers, he made a number of dubious claims, implying in one case that Donald Trump was a major, behind-the-scenes player in a tiny cruise line with a thinly-traded stock. The Missouri action resulted in his employer, Investors Associates, withdrawing from the state of Missouri. (The brokerage firm claimed to have been unaware of the suspect on-line touting by the broker, who supposedly engaged in the activity after hours from his home computer.)
* Investors were told "how to make big money from your home computer" as part of the "Electronic Message" scheme promoted by a San Antonio man and at least nine other individuals scattered around the United States, according to a cease-and-desist action filed by the New Jersey Bureau of Securities. In what might be referred to as an "e-mail chain letter," the promoter claimed that, in exchange for $5, investors could earn a return of $60,000 in just three to six weeks. Participants were told to send $1 to each of five people on an on-line list. Then, those who sent money were to add their own name to the list and post a message explaining the scheme on ten different computer bulletin board sites. In practice, the scheme amounted to a high-tech variation of the old pyramid scam, which is barred under federal and state laws.
* The Texas State Security Board is investigating a case in which an Austin-area retiree sent a total of $10,000 to an out-of-state man who promoted himself on one major computer bulletin board service as a skilled money manager. In fact, the man was not a licensed stockbroker or investment adviser. The mutual fund in which the retiree had invested turned out to be nonexistent and it appears that the funds went directly into the promoter's pocket.
* State securities agencies and other investment regulators are now looking into cases in which the price of shares in little-known, thinly-traded stocks appear to have been systematically manipulated through messages posted on commercial bulletin board services and on the Internet. The share price of stock in one Canadian company, Wye Resources, Inc., which was reported to own a Zaire diamond mine where a major strike had been made, more than tripled in price in early 1994. …