A millennium ago (back in the 1990s) a significant portion of
securities frauds could be traced to boiler room penny stock firms,
where dozens of telemarketers (known as cold-callers) furiously worked
the phones to dump their “products” on unwary customers. That kind of
setup took time and money; it required a brokerage firm, rooms full of
brokers and their assistants, capital to operate the firm, licenses, and
finally, a product to sell.
Then came the Internet. And, to paraphrase one popular commercial, investment fraud just got a lot easier. Now, all a scam artist needs is a computer, an e-mail list, a vivid imagination, and a heart of stone. Now, fraudulent stock schemes can be carried out by creating an “e-buzz” – through bogus press releases, online newsletters, mass e-mailings and visits to online chat rooms and message boards. Each of these tools is employed with a single goal in mind – to get people to buy stock, increase volume, and support higher prices.
The plan is usually simple. Pump up the price of a stock, and then dump a truckload of shares at significant profits. And disappear. It is this final step that distinguishes Internet fraud from traditional incarnations of the “pump and dump.” It is just so much easier for the perpetrator to vanish.
In those old days, the boiler room brokers could be identified and located with ease - brokerage firms cannot easily fade from site. Cyber crime is different. It operates under a cloak of anonymity. Screen names and Internet “monikers” can be changed in an instant. Who is really posting false or misleading information on chat boards, in e-mails and through seemingly responsible newsletters? In all likelihood, the investor will never know - the perpetrator moves from chat room to message board, before disappearing into cyberspace.
Sound scary? It is. Still, there are some warning signs that should have investors proceeding with caution – or not at all. For example:
Every scam has one goal in common – to separate an investor from his or her money as quickly and effortlessly as possible. Unfortunately, the tools of investment fraud have become easily available. Anyone can assume a fictitious identity on the Internet, generate e-mails, chat away, and send out fictitious or misleading press releases.
All it takes is the click of a button.
About Hartley Bernstein: Hartley Bernstein is a corporate and securities attorney and civil litigator with a specialty in business transactions and civil litigation.
Then came the Internet. And, to paraphrase one popular commercial, investment fraud just got a lot easier. Now, all a scam artist needs is a computer, an e-mail list, a vivid imagination, and a heart of stone. Now, fraudulent stock schemes can be carried out by creating an “e-buzz” – through bogus press releases, online newsletters, mass e-mailings and visits to online chat rooms and message boards. Each of these tools is employed with a single goal in mind – to get people to buy stock, increase volume, and support higher prices.
The plan is usually simple. Pump up the price of a stock, and then dump a truckload of shares at significant profits. And disappear. It is this final step that distinguishes Internet fraud from traditional incarnations of the “pump and dump.” It is just so much easier for the perpetrator to vanish.
In those old days, the boiler room brokers could be identified and located with ease - brokerage firms cannot easily fade from site. Cyber crime is different. It operates under a cloak of anonymity. Screen names and Internet “monikers” can be changed in an instant. Who is really posting false or misleading information on chat boards, in e-mails and through seemingly responsible newsletters? In all likelihood, the investor will never know - the perpetrator moves from chat room to message board, before disappearing into cyberspace.
Sound scary? It is. Still, there are some warning signs that should have investors proceeding with caution – or not at all. For example:
1. Is financial information about a Company readily available for the public to review? If so, has it been reviewed by independent auditors? Of course, investors have grown skeptical of auditors after recent revelations from Enron, Xerox, WorldCom and a host of other public companies whose audited financial statements do not withstand scrutiny.These tips only offer a starting point. The hardest task is for investors to exercise discipline, to resist the temptation to make a quick buck, and to investigate before they invest.
Still, audited financial statement are likely to be a far more accurate reflection of the Company’s activity than unaudited projections posted on a Company’s web site, or touted by a paid analyst. Be skeptical if the Company does not file regular reports with the SEC, or is delinquent in those filings. Without that information how can you, as an investor, fairly assess the prospects of the business or the condition of the Company?
2. Does the person making the recommendation say that he or she is a stockbroker? Every broker must be registered with the NASD and any state in which he or she is selling securities. Investors can check out the status of any broker by contacting the NASD at www.nasdr.com. The NASD will provide public customers with detailed information about any registered broker or brokerage firm, including the broker’s employment background, registration status and disciplinary history.
What if the NASD has no records about this so-called broker? Contact NASD Regulation immediately, and provide the regulators with any information you received from that “broker.”
3. Have you been promised that an investment is “guaranteed” or “risk-free?” This one is easy. There are no guarantees in the stock market. No reputable investment advisor or broker will ever guarantee a rate of return or the success of a company. There are different levels of investment risk, from extremely conservative to highly speculative, – and a broker or salesperson should outline those risks with care - but no investment is free from risk.
4. Have you been told that you must act immediately – or lose a once-in-a-lifetime opportunity? What’s the rush? Consider the nature of the investment and its source. Take your time and investigate the potential investment. If the salesperson continues to push for an immediate commitment he or she may want you to leap before you look. That is generally the prescription for a long and perilous fall.
5. Have press releases and online promoters been announcing “big news” and projecting record revenues? Be cautious. Internet touts may be trying to drive up interest in a Company as part of a “pump and dump” scheme. Thanks to the Internet, and e-mail, these promotions can spread like wildfire, resulting in increased attention for a Company, a spike in volume, and an environment that lets the promoters dump their shares.
Investors should be wary of glowing newsletters and press releases. A fair report will always point out the risks, discuss the problems a Company is likely to encounter, and give a balanced view of the Company’s financial position. If the “report” ignores the negative, and embellishes the positive, you can be sure you are not getting the full story.
6. Investments that promise business opportunities abroad (outside the United States and Canada) pose their own set of problems. It can be significantly more difficult for investors to verify information about foreign companies or to get all of the facts about promised overseas business combinations. Unscrupulous promoters often operate from outside the United States, making it more difficult for regulators to track them down and hold them accountable.
7. An unscrupulous stock promoter is always eager to close the deal as quickly as possible. He or she may provide a federal express account number so funds can be delivered overnight. They may even offer to have an investor’s check picked up by messenger. Why? One goal should be obvious. They want to get your money before you can change your mind. Sometimes they just want to get your bank account number and other personal information.
8. Does the investment newsletter have an agenda? As an investor you want to know if the newsletter publisher has an ulterior motive for recommending a stock. Has he or she received stock, or cash, for publishing a recommendation? Newsletters should contain disclaimers disclosing this information. But even the presence of a disclaimer does not necessarily signify legitimacy. The newsletter that has been paid, whether in stock or in cash, has a conflict of interest that may prevent it from being objective. Is the newsletter providing a balanced analysis, or is it simply a paid tout trying to pump up interest so it can dump shares?
9. Beware of code words. Like “Homeland Security,” “anti-terrorism products,” and “AIDS treatments.” They are often used to lend an air of legitimacy to a Company and to kindle investor interest. Gather enough information to be certain that the Company has substance, that its management team is qualified and experienced, and that it is sufficiently financed to pursue its business plan.
10. If you receive an e-mail recommending a Company, does the sender use his or her own name? Or does it arrive from an anonymous source, with a vague or misleading subject heading? Just today we received an investment recommendation from “a good friend,” and the subject of the e-mail was “lunch at 1?” That certainly does not suggest a credible, professional or reliable source of information.
Know who is making a recommendation. Does the person use his or her own name, and provide a phone number or address where he or she can be contacted? If you are relying on nothing but an alias or pseudonym, how can you possibly verify the integrity or agenda of the promoter? Don’t deal with ghosts. They’re not all as friendly as Casper.
11. If you believe you have been the victim of an investment fraud, contact the SEC, NASD or your local state regulator without delay. A complete list of these contacts is provided at REGULATORS ON PATROL – CONTACT THE REGULATORS.
Every scam has one goal in common – to separate an investor from his or her money as quickly and effortlessly as possible. Unfortunately, the tools of investment fraud have become easily available. Anyone can assume a fictitious identity on the Internet, generate e-mails, chat away, and send out fictitious or misleading press releases.
All it takes is the click of a button.
About Hartley Bernstein: Hartley Bernstein is a corporate and securities attorney and civil litigator with a specialty in business transactions and civil litigation.
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