Securities fraud abounds on the Internet
Laws designed to protect small investors from fraud and abuse do apply in
cyberspace. Scam artists often fail to follow state requirements.
Promises of huge financial returns from securities investments such as stocks
and bonds, oil and gas leases or limited partnerships are often nothing more
than that -- empty promises. A growing number of consumers, primarily seniors,
are targeted by fraudulent securities promoters and persuaded to invest their
life's savings.
Although most securities investments are not fraudulent, be leery when a
promoter promises huge returns on an investment.
Check on securities registration
Before investing in securities, there are several things you can and should do.
Unless specifically exempted by statute, all securities brokers and
securities must be registered with the Securities Division of the Secretary of
State's Office.
Tips to avoid scams
 Don't invest unless you can afford to
lose what you invest.
If it sounds too good to be true, it
usually is. No legitimate promoter will claim to offer a risk-free investment --
commodities or securities investment is a form of speculation or risk-taking. A
solicitation that claims there is little or no risk is a dangerous "red flag."
Verify that a brokerage firm is
registered with the securities commissioner. Firms that trade commodities also
are usually required to register with the Commodity Futures Trading Commission
and are subject to its regulations.
Registration means the CFTC can tell
you whether there are any past legal actions taken or present ones pending by
the government against the company. Be suspicious of unregistered firms that
trade commodities and remember that not all registered firms are honest ones.
Also, consider consulting with a trusted adviser.
Make sure the broker's address and
phone number match the company for which he claims to work. Never give money to
a collector or messenger who visits your home following up on a phone sale.
Never write the broker's name on a check as payee; use the company's name.
Ask the firm to send a prospectus or
other literature about the firm. Don't be swayed, however, by the glossy
brochures some con artists produce. Also, ask for a written proposal describing
conditions of the contract and a form outlining the risks involved with the
investment.
Ask the phone solicitor to explain
the investment to your lawyer or accountant. Even if you don't have a lawyer or
accountant, ask because the salesperson's response might be a tip-off to his
real identity. A legitimate broker will have no objections while a con artist
will say something like, "Normally I'd be glad to, but there just isn't enough
time for that," or "Those people don't give investment advice."
Arrange for a meeting at the broker's
or your attorney's office. It is never a good idea to do business with a
faceless person over the phone. Ask a third party to attend.
How one scam works
Fraudulent securities brokers often run their business from a "boiler room" -- a
low-budget office lined with phones. The classic securities fraud involves an
out-of-state promoter who contacts prospective buyers by phone. The promoter's
sales pitch includes:
Claims that no risk is involved.
Guarantees of large and fast
profits.
A requirement that money be paid
immediately or the opportunity will be missed.
The consumer — convinced the promoter is making a legitimate offer — sends
large sums of money to the promoter. The fraudulent promoter then disappears
with the money.
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