(3/22/99)
WASHINGTON (AP) _ The Internet investment newsletter gave the business
startup a glowing promotion, so Galen O'Kane pumped in a hefty chunk of his
savings.
But when he tried to visit the company, Electro-Optical Systems Corp.,
outside Boston, O'Kane found an empty building _ no manufacturing plant, no
workers.
Such cases are prompting regulators and lawmakers to focus on what they call
a new and growing problem: amateur investors squeezed by old-fashioned stock
swindles that are gussied up with the Internet's new technology.
O'Kane, 39, an electrical engineer from Ellsworth, Maine, and an investor
fleeced in another case planned to testify Monday at a hearing of the Senate
Governmental Affairs subcommittee on investigations.
The Internet "has offered consumers substantially greater access to
financial information and investment opportunities," said Sen. Susan Collins,
R-Maine, the subcommittee chairwoman.
"However, I am concerned that the Internet appears to provide 'cybercrooks'
with equally profound avenues for committing financial fraud," Collins said.
"(It) gives some consumers a false sense of security, credibility and control
regarding their investments."
O'Kane fell victim to a classic "pump and dump" scheme, where promoters push
up a stock's price by making false claims about the company, later to sell
their own shares to cash in on the artificially high price.
In the case of Stow, Mass.-based Electro-Optical, which was supposed to have
been a manufacturer of fingerprinting devices, promoters allegedly made at
least $5 million from such fraudulent share sales, according to a civil lawsuit
filed by the Securities and Exchange Commission in 1998. The defendants were
alleged to have pushed the stock price in one day from between 25 and 50 cents
to more than $5 a share.
Like traditional investment scams, cyberspace scams usually involve
small-company stocks that are relatively cheap, risky and thinly traded. Some
companies portray themselves as Internet businesses.
The difference now is that stocks can be promoted fraudulently in Internet
junk mail, online newsletters, electronic "chat rooms" and World Wide Web
sites. Promoters do not have to give the customer the hard sell over the
telephone in unsolicited calls.
In many cases, people promoting stocks in a practice known as "touting" have
failed to disclose they were paid to do so, as required by law.
Because the Internet is everywhere, unscrupulous stock promoters anywhere in
the world can cloak themselves in anonymity and lure investors across America.
That means real headaches for international, federal and state securities
regulators, who must pursue fraud, coordinate their efforts and educate
investors about the risks, according to a new report by congressional
investigators.
The rapid growth in online securities fraud "could ultimately place a
significant burden on the regulators' limited investigative staff resources and
thereby limit the agencies' capacity to respond effectively," the General
Accounting Office said in a report to be released at Monday's Senate hearing.
Also scheduled to testify at the hearing is Thomas Gardner, a founder of The
Motley Fool, a respected investment information service. Gardner believes the
key factor allowing Internet securities fraud to flourish is investor
ignorance.
"If people knew enough not to make investment decisions based upon tips,
rumors and touts and did their homework, they would not fall for most stock
frauds on the Internet or otherwise," he said in prepared testimony.
On the front lines of the Internet financial fraud battle are the U.S.
Securities and Exchange Commission and state securities regulators.
In addition to "pump and dump" stock manipulations and deceptive stock
touting, those regulators have been cracking down on illegal pyramid schemes,
insider trading and unlicensed brokering or advising on investments.
In October, the SEC made the first-ever nationwide sweep against stock
touters on the Internet who failed to disclose they were paid to make the
promotions. The agency filed fraud charges against 44 people and companies,
following up in February with charges against another nine people and four
firms.
This month, the Federal Trade Commission, state securities regulators and
other law enforcement authorities took 33 actions against pyramid schemes on
the Internet that tricked consumers into handing over cash and rarely paid out
any promised earnings.
The SEC advises investors to read its Cyberspace Alert, available on
the investor assistance and complaints link of its Web site at www.sec.gov. It
also is available by calling 1-800-SEC-0330.
