Investment bulletin board scams
Cyberspace was once inhabited largely by government agencies and academics
linked through a decentralized computer network now known as the Internet.
The Internet's rise has coincided with a booming economy, one fueled in large
part by consumer spending. At the same time, employers have shifted more
responsibility for retirement savings to their employees. The economy and
investors have found common ground in cyberspace.
With its instant access, speed and relatively low cost, the Internet
understandably has drawn legitimate commerce. Some companies sell securities
through their Web sites. Some offer online brokerage and banking services.
The Pennsylvania Securities Commission was among the first state securities
regulators to recognize the Internet's potential for good and evil.
Technological innovation attracts legitimate businesses hoping to cash in on the
cost savings. Invariably, this leads to the rise of illegitimate enterprises
hoping to take advantage of the unsuspecting.
An investor can't see who's behind a particular Web site or a "tip" on an
Internet bulletin board. Familiar trademarks and logos can be altered and
consumer confidence manipulated by illegal tampering with trademarks of
legitimate companies.
Just as Internet commerce escalates, so too does Internet securities fraud.
"Prime bank" frauds, for example, promise investors high rates of return on
fictitious financial instruments often called "prime" bank notes by the scam
artist and traded by nonexistent international banks. In "pump and dump"
schemes, insiders with cheap shares post glowing reports about a company to
"pump" up the price solely for the purpose of "dumping" their shares at the
inflated price on unsuspecting victims.
How an Investor Bulletin Board Scam Might Work
"Is anyone out there following Company X," reads the first message on an
online bulletin board. Responses follow.
"I heard that Company X is about to make a major announcement. E-mail me or
call this toll-free number to get an information package."
"I spoke to Company X's CEO, who confirmed details of next month's big
news. I've bought 10,000 shares. Look for share price to double in next month!
Get it now!"
"Big news is just around the corner. We hear from a friend who has visited
Company X that it is going to be even bigger than we thought. There's still time
to get in."
"Short-sellers are in the market! Keep the faith . . . This will bounce
back. The smart money will use the price as an opportunity to buy more and
dollar average."
The original message in this hypothetical bulletin board might be posted by
an unscrupulous company, market-making brokerage or large shareholder.
Subsequent messages could be left by the same person using an alias or by
accomplices posing as disinterested outsiders.
The goal would be to interest unwary investors, who then drive up the stock
price through a buying surge. The schemers stand to make substantial profits
when they sell their cheap shares. after the price collapse, talk of the company
ceases and the schemers move on, hyping a new stock.
How to Protect Yourself
Beware and be realistic when it comes to the Internet:
- Don't expect to get rich quickly. The online world is filled with timely and
accurate information that can make you a smarter investor. Alas, it's also home
to a growing amount of investment fraud and abuse. Keep your excitement and
expectations in perspective: evaluate information as you would any magazine
article, television report or whispered hot tip.
- Don't assume that your investment bulletin board is policed. Most online
computer services take a hands-off approach to claims made in message postings.
Even the services that minimally police are swamped by the volume literally
millions of messages each month. Nothing prevents a con artist from posting
pitches for a swindle. Often the only check on abusive messages is "flaming" by
other users.
- Don't buy thinly traded, little-known stocks on the basis of online hype.
These are the stocks that are most susceptible to manipulation. Unlike blue
chips and other stocks with substantial numbers of shares available for buying
and selling (called "float"), the price of low-volume stocks can be moved with
relatively small strategic trades. This is why online hype usually involves
previously unknown securities, often for companies involved in mining or
high-technology. Even if a hyped stock moves up, proceed with extreme caution,
as this just may be part of the overall manipulation. Always do your own
research using reputable sources, many of which are available online.
- Don't act on the advice of a person who hides his identity. Many computer
bulletin boards allow people to use aliases and nicknames. This is intended to
protect privacy, but it also can be exploited by fast-buck artists. You may end
up dealing with an undisclosed broker, investor or company insider intent on
driving up (or down) the price of a stock through false information or baseless
speculation that is difficult or impossible to disprove. Don't assume that two
or more people talking up a stock are two distinct people.
- Don't get suckered by claims about "inside information," including pending
news releases, contract announcements and products. Investment bulletin boards
and discussion groups are crammed with hot tips about impending developments
sure to send a stock soaring in value. Just because these tips appear in
cyberspace does not mean that they are exempt from federal insider-trading laws.
It is extremely unlikely that genuine insider information will be broadcast on
an investment bulletin board.
- Don't assume that all claims have been proved by information or visits.
People who hype stocks online make all sorts of claims about visiting companies,
inspecting mining operations and having conversations with company officials.
You might not be able to verify who is making these claims, much less whether
any of the information is true or the supposed research took place. A tactic of
investment schemers is to talk up companies located in remote corners of the
globe, where it is impossible for you to visit or obtain meaningful information.
- Don't forget to look for potential conflicts of interest. A growing number
of online stock analysts receive cash or shares in exchange for glowing comments
about the companies in question. Although federal law requires analysts to
prominently disclose this fact, others make little or no mention of it. Make
sure you always know why someone is so high on an investment opportunity.
- Don't forget to make sure that an investment opportunity and the person
promoting it are properly registered with your state's Securities Commission.
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