Internet Fraud: How to Avoid Internet Investment Scams

Introduction
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.

On October 28, 1998, the SEC announced charges against 44 stock promoters caught in a nationwide enforcement sweep to combat Internet fraud. These promoters failed to tell investors that more than 235 companies paid them millions of dollars in cash and shares in exchange for touting their stock on the Internet.

Not only did they lie about their own independence, some of them lied about the companies they featured, then took advantage of any quick spike in price to sell their shares for a fast and easy profit," said SEC Director of Enforcement Richard H. Walker.

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.


Navigating the 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.

Online Investment Newsletters
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 for fraud.

Some companies 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.

Bulletin Boards
Online bulletin 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.

E-mail Spams
Because "spam" – 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 time.

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.