What You Should Know About...
E-Schemes and E-Scams

Internet Investment Fraud—What it is and How to Avoid It

For many investors, the Internet is an invaluable research tool that helps them evaluate investment opportunities and learn about various strategies and techniques. However, it has also become a playground for unscrupulous individuals looking to take advantage of investors through a variety of schemes and scams that already have caused financial harm to unsuspecting investors.

In October 1998, the Securities and Exchange Commission (SEC) helped investors understand the magnitude of Internet investment fraud when it filed charges against 44 stock promoters who failed to disclose to investors that 235 companies had paid them millions of dollars in cash and stock in return for Internet-based promotion efforts that were designed to raise stock prices.*

The Internet provides inexpensive, convenient access, anonymity, and an attentive, affluent audience of millions — no wonder it’s a popular medium for con artists. In response to the growth of online investment fraud, the SEC, the Federal Trade Commission, and the National Association of Securities Dealers have all devoted resources to reducing fraudulent activity. However, the use of investment scams likely will continue to proliferate despite enforcement efforts, so investors need to educate themselves on the types of scams that exist and thoroughly investigate all investment opportunities and information received through the Internet.

Three types of Internet forums are especially popular with con artists: online investment newsletters, bulletin boards, and e-mail.

Online Newsletters
Online investment newsletters have become very popular. Because newsletters can easily be made to look like unbiased information sources that offer access to research and expert stock picks, they have become a choice medium for con artists looking to prey on unsuspecting investors. Masquerading as outlets of credible information, some individuals who publish online newsletters accept money from companies in exchange for promoting the stock of the company — without disclosing this arrangement to the reader.

Another common tactic employed by illegitimate newsletter publishers is to spread inaccurate information or promote worthless stocks in an effort to drive up the price of their personal holdings.* Once the price has risen sufficiently, those who touted the stock will quickly sell their shares and reap the profits.

Bulletin Boards
Consisting of “threads” made up of individual messages referring to a particular stock, bulletin boards are a popular forum for investors searching for information on specific companies. Unfortunately, they are also a tool used by individuals looking to defraud investors.

Because many bulletin boards allow participants to disguise their identity with an alias, there is no way of telling how credible the information is on many bulletin boards. Con artists often pretend to reveal “inside” information on a company, or post multiple positive messages under different aliases — giving the impression that there is widespread interest and support behind the stock — and then sell quickly to capture the artificially high stock price. Referred to as “pumping and dumping,” this tactic is usually done with small-cap stocks because they are less heavily traded and therefore prices are more easily manipulated.

E-Mail
The popularity and convenience of e-mail provides con artists with an effective means of reaching countless investors with very little effort or cost. By sending personalized messages to thousands of individuals in broadcast e-mails, con artists can communicate false information about a company or promote a fraudulent investment opportunity. In many cases, e-mail has replaced cold calling and mass mailing as a means of targeting individuals to solicit their participation in a particular scam. Con artists also use e-mail to draw attention to their own fraudulent online newsletters and bulletin-board threads.

While investment fraud can be a problem facing investors who use the Internet for advice and research, it is important to note that there is a significant amount of legitimate information on the Internet. By taking a few precautionary steps, investors can successfully tap into the wealth of knowledge available on the Internet. Here are some basic tips for investors who use the Internet to research investment opportunities:

• Do not make investment decisions just because of what you’ve seen in an online newsletter, bulletin board or e-mail. Before making an investment decision, consult a qualified financial advisor who is capable of analyzing financial statements, verifying claims about new products and reviewing the quality of management.
  
  
• Avoid investing in companies that do not regularly file reports with the SEC. This can be checked by accessing the SEC’s EDGAR database online or by calling the SEC at 202-942-8090.
  
  
• If you are at all unsure about the legitimacy of an opportunity after doing research, contact the SEC or your state securities regulator and ask whether any complaints about the company or its promoter have been filed.
  
  
• Beware of investments that use terms like “guaranteed,” “risk-free,” “limited offer,” “high return,” “fast profits,” “insider information,” and “safe as a CD.” Remember: investments that sound too good to be true usually are.
  
  
• Exercise special caution when evaluating offshore opportunities and investment opportunities in other countries. If something goes wrong, getting answers or locating your money is often extremely difficult.

A well-informed investor is a scam artist’s worst enemy. And while many Internet resources are credible, falling victim to an Internet investment fraud can be a very expensive lesson. To find out more about researching investment opportunities and protecting yourself against investment fraud, contact your financial advisor.

Source: Securities and Exchange Commission.

Provided as a courtesy by the investment professionals at David A. Noyes & Company.

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