Investment Scams Proliferate On Web

Thanks to the attack of ILOVEYOU and other viruses, computer users now look at their e-mail and wonder if it's as benevolent as it appears.

Sorry to report that the same danger exists when you Web-surf -- things often aren't what they seem.

The growth of investing-related information on the Internet has been accompanied by a rise in investment-related ripoffs.

No doubt the Web remains a great place to research, trade and discuss stocks and mutual funds. But rookie investors seeking help on the Web should also be aware that there are also some fast-buck operators out there.

Federal officials just announced a huge series of arrests in what they said was the largest investment scam bust ever.

On the Web, you'll find fraudulent spams, deliberately inaccurate analysis, message boards with sales pitches -- disguised as tips from ordinary people -- for worthless stocks or nonexistent ones.

Why do people do this? In some cases, they are in line to receive financial bonuses, commissions or shares from the companies that they promote based on how much business they stimulate from their "posts" to message boards. This misguided enthusiasm will hype up the stock's price. Then, when the price reaches its peak, the scammers will sell off their shares before the stock comes down to earth -- "earth" as in fractions of a dollar per share, if that.

A fascinating article called "Deliberate Misinformation on the Internet!? Say It Isn't So" appeared in theMay issue ofSearcher magazine, a monthly primarily written for librarians. In the piece, Western State University College of Law librarian Carol Ebbinghouse identifies several forms of investment fraud that warrant the highest suspicion:

• Scalping: This is the term of the trade for the aforementioned practice: When someone touts stock, you buy it, they sell their shares, and you're left with nothing.

• Pump and Dump: Offline but related -- when telemarketers use high-pressure tactics to sell stocks.

• Cybersmearing: Reverse hype -- when a stock or a company is derided on a message board in an attempt to drive the price down, creating a buy-in opportunity for the unscrupulous rumormongers who knew that the criticism was baseless. An example would be a user who posts messages on an investor board insinuating that a company is about to lose a key customer. The false information hits, the stock goes down, the investor buys in and the target of the rumor issues a denial. As the static from the false information dissipates, the price rises again, and the investors make a bundle.

Et Tu?

Ebbinghouse also lists some frauds or near-frauds that may be more scurrilous because they're perpetrated not by lone scammers but by companies themselves:

• Microcaps: Sale of stock in tiny companies that are worthless notions in someone's head, or at the very least, are untested and unregistered with the Securities and Exchange Commission.

• Misstatement of earnings figures: This sleight-of-hand accounting practice by some businesses may not be technically illegal, but it can be as misleading as a straight-out scam. One practice is to temporarily shift cash on hand into the revenue column, thus inflating the company's reported income.

• Cyberlibel by competitors: Call it business-sponsored rumor terrorism. Some amoral companies will hire freelance surfers to post thinly veiled insults that have the potential to damage a rival's stock price. Similar to cybersmearing, such a post may read, "I hear that General Widget's top three salespeople are leaving ..."

Someone Is Looking Out For You

In detecting these scams, you're not on your own. The SEC's Internet Enforcement Program conducts investment-related Internet investigations and prosecutions. They've posted some of their recent catches on their site.

Let's take a look at just one representative case, as the SEC describes it:

"In a classic pump-and-dump, defendants brought a California airline public through a merger with a public shell company. Although the airplanes never took off, the stock price did, through bogus trades and false statements in press releases and an Internet newsletter.

"After pumping up the price to $5, defendants operated an unregistered broker-dealer to solicit investors to purchase stock (that) defendants were dumping. Defendants unloaded 1 million shares before the price collapsed back to less than 20 cents.

"Four defendants had prior records, ranging from multiple felony convictions to an SEC injunction and a (bar on trading instituted by Nasdaq."

Intrigued? Read the seamy detailshere. More cases are linked from this page on the SEC site. A real "Swindler's List."

Sound Familiar?

If any of those tales of woe strike close to home, you might want to fill out the SEC's online complaint form. The agency wants to hear from you "(i)f you believe that you have been defrauded by a broker-dealer, an investment adviser or any other person or entity (in which a security is involved) ... especially if it relates to the Internet," its site says.

Kind of gives the term "bull market" another meaning, huh? Yet this "bull" has less to do with the floor of the stock exchange and more with the floor of the stockyard.

Further Reading:

• The FBI's Internet Fraud Complaint Center