How to Avoid Internet Investment Scams
The Internet serves
as an excellent tool for investors, allowing them to easily and
inexpensively research investment opportunities. But the Internet
is also an excellent tool for fraudsters. That's why you should
always think twice before you invest your money in any
opportunity you learn about through the Internet.
This alert tells
you how to spot different types of Internet fraud, what the SEC
is doing to fight Internet investment scams, and how to use the
Internet to invest wisely.
Frontier: Where the Frauds Are
The Internet allows
individuals or companies to communicate with a large audience
without spending a lot of time, effort, or money. Anyone can reach
tens of thousands of people by building an Internet web site,
posting a message on an online bulletin board, entering a discussion
in a live "chat" room, or sending mass e-mails. It's easy for
fraudsters to make their messages look real and credible. But
it's nearly impossible for investors to tell the difference between
fact and fiction.
Hundreds of online
investment newsletters have appeared on the Internet in recent
years. Many offer investors seemingly unbiased information free
of charge about featured companies or recommending "stock picks
of the month." While legitimate online newsletters can help investors
gather valuable information, some online newsletters are tools
pay the people who write online newsletters cash or securities
to "tout" or recommend their stocks. While this isn't illegal,
the federal securities laws require the newsletters to disclose
who paid them, the amount, and the type of payment. But many fraudsters
fail to do so. Instead, they'll lie about the payments they received,
their independence, their so-called research, and their track
records. Their newsletters masquerade as sources of unbiased information,
when in fact they stand to profit handsomely if they convince
investors to buy or sell particular stocks.
Some online newsletters
falsely claim to independently research the stocks they profile.
Others spread false information or promote worthless stocks. The
most notorious sometimes "scalp" the stocks they hype, driving
up the price of the stock with their baseless recommendations
and then selling their own holdings at high prices and high profits.
To learn how to separate the good from the bad, read our tips for
checking out newsletters.
boards – whether newsgroups, usenet, or web-based bulletin boards
– have become an increasingly popular forum for investors to share
information. Bulletin boards typically feature "threads" made
up of numerous messages on various investment opportunities.
While some messages
may be true, many turn out to be bogus – or even scams. Fraudsters
often pump up a company or pretend to reveal "inside" information
about upcoming announcements, new products, or lucrative contracts.
Also, you never
know for certain who you're dealing with – or whether they're
credible – because many bulletin boards allow users to hide their
identity behind multiple aliases. People claiming to be unbiased
observers who've carefully researched the company may actually
be company insiders, large shareholders, or paid promoters. A
single person can easily create the illusion of widespread interest
in a small, thinly-traded stock by posting a series of messages
under various aliases.
– junk e-mail – is so cheap and easy to create, fraudsters increasingly
use it to find investors for bogus investment schemes or to spread
false information about a company. Spam allows the unscrupulous
to target many more potential investors than cold calling or mass
mailing. Using a bulk e-mail program, spammers can send personalized
messages to thousands and even millions of Internet users at a
How to Use the
Internet to Invest Wisely
If you want to invest wisely and steer clear of frauds, you must
get the facts. Never, ever, make an investment based solely on what
you read in an online newsletter or bulletin board posting, especially
if the investment involves a small, thinly-traded company that isn't
well known. And don't even think about investing on your own in
small companies that don't file regular reports with the SEC, unless
you are willing to investigate each company thoroughly and to check
the truth of every statement about the company. For instance, you'll
- get financial
statements from the company and be able to analyze them;
- verify the claims
about new product developments or lucrative contracts;
- call every supplier
or customer of the company and ask if they really do business
with the company; and
- check out the
people running the company and find out if they've ever made
money for investors before.
And it doesn't
stop there. For a more detailed list of questions you'll need
to ask – and have answered – read Ask Questions.
And always watch out for tell-tale signs
Here's how you
can use the internet to help you invest wisely:
Start With the
SEC's EDGAR Database
The federal securities
laws require many public companies to register with the SEC and
file annual reports containing audited financial statements. For
example, the following companies must file reports with the SEC:
- All U.S. companies
with more than 500 investors and $10 million in net assets;
- All companies
that list their securities on The Nasdaq Stock Market or a major
national stock exchange such as the New York Stock Exchange.
Anyone can access
and download these reports from the SEC's EDGAR database for free. Before
you invest in a company, check to see whether it's registered
with the SEC and read its reports.
But some companies
don't have to register their securities or file reports on EDGAR.
For example, companies raising less than $5 million in a 12-month
period may be exempt from registering the transaction under a
rule known as "Regulation A." Instead, these companies must file
a hard copy of the "offering circular" with the SEC containing
financial statements and other information. Also, smaller companies
raising less than one million dollars don't have to register with
the SEC, but they must file a "Form D." Form D is a brief notice
which includes the names and addresses of owners and stock promoters,
but little other information. If you can't find a company on EDGAR,
call the SEC at (202) 551-8090 to find out if the company filed
an offering circular under Regulation A or a Form D. And be sure
to request a copy.
between investing in companies that register with the SEC and
those that don't is like the difference between driving on a clear
sunny day and driving at night without your headlights. You're
asking for serious losses if you invest in small, thinly-traded
companies that aren't widely known just by following the signs
you read on Internet bulletin boards or online newsletters.
Contact Your State
Don't stop with
the SEC. You should always check with your state
securities regulator, which you can find on the website of
the North American Securities Administrators Association, to see
if they have more information about the company and the people
behind it. They can check the Central Registration Depository
(CRD) and tell you whether the broker touting the stock or the
broker's firm has a disciplinary history. They can also tell you
whether they've cleared the offering for sale in your state.
Check with the
Financial Industry Regulatory Authority (FINRA)
To check the disciplinary
history of the broker or firm that's touting the stock, use FINRA's
website, or call FINRA's BrokerCheck Program hotline at (800)
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
The "Pump And
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.
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
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:
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
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.
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.
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
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
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
If you believe
that you have been the victim of a securities-related fraud, through
the Internet or otherwise, or if you believe that any person or
entity may have violated or is currently violating the federal
securities laws, you can submit a complaint using our online complaint form or email
us at email@example.com.
If you are aware
of an online fraud, tell us about