Superhighway to Financial Ruin?

Steve Davis sits down at his home computer after a long day's work. Steve has managed to save a few thousand dollars and is thinking about investing in the stock market. Like many Americans, Steve recently became connected to the Internet, and he has found it to be a fascinating and useful tool for acquiring information on just about any subject. Tonight, he logs on and connects to his favorite investment-related bulletin board. He enters an electronic chat room, where a discussion is in progress.

"I've been hearing that Hyperscam Global, Ltd. is a company to watch. Does anyone out there have any information?"

"This company is poised to go huge. You can buy in at a steal."

Intrigued, Steve reads on. Other postings reveal that Hyperscam Global is engaged in developing telecommunications systems, and that there is a toll-free number he can call as well as a website address he can access to receive more information about the company. By the end of the evening, having read the company's glowing prospectus via his computer monitor, he's ready to reach for his wallet.

What Steve doesn't know is that Hyperscam Global is a fictional organization conceived by a former telephone solicitor with a felony conviction for telemarketing fraud. Hyperscam Global is made up of little more than a con man armed with a computer and a way with words. The 'discussion' that initially sparked Steve's interest in the company was authored by the same guy.

Steve is a fictional character, but his experience could be very real. The Internet has profoundly altered the way in which increasing numbers of people learn, communicate, perceive the world, and conduct business. As with many another new frontiers, however, the territory of cyberspace comes complete with its gang of outlaws.

Securities regulators have taken action against companies and individuals who have looted the public of millions of dollars by drumming up business on the Internet. Among them was a company promising a 50 percent return on investments in a Caribbean ethanol plant, a couple selling non-existent "prime bank notes," and a man soliciting investors in an eel farm. Other scams have involved gold mining, ostrich farms, high-tech ventures, and oil and gas mining.

It is hardly a surprise that the Internet should be a fertile ground for investment fraud, since its potential as a tool for victimizing unwary investors is enormous. It provides a cheap, relatively anonymous avenue to reach millions of people with a few keystrokes. It is unknown exactly how many people have been taken in by fraudulent investment offers on the Internet, but it is reasonable to assume that the number will increase as more and more people go online. Current figures indicate that at least 40 million people regularly access the Net.

Cyber-criminals have a number of ways to get their message to you via your computer. Bulletin boards, new groups, and chat rooms are widely used by scam artists to rope in investors. Many chat rooms and news groups provide the "bad guys" with an additional hedge against detection by regulators, in that participation by potential investors is by invitation only. As you might guess, the crooks are not about to let the regulators in on the discussions. Chat rooms and new groups are also appealing to computer crooks because identities can be readily concealed. This allows promoters to craft sales pitches that look remarkably like unsolicited testimonials from satisfied investors. Readers have no way of knowing whether messages are legitimate or whether they were written by con men trying to sell a scam. Another forum used to disseminate investment sales pitches is bulk e-mail. This allows for mass delivery of a canned message to a targeted audience.

How can you protect yourself from fraud on the Internet?

Here are some suggestions:

  • Don't assume that computer postings are monitored for truthfulness. Most online service providers don't check out the content of messages they disseminate. They aren't in the business of censoring communication. It is up to you to get the facts.
  • Don't believe everything you read. Reports of sky-high investment returns are almost always outright lies.
  • Watch for red flags. These include rumors about inside information, big announcements on the horizon, or stock prices expected to jump dramatically. Be skeptical if someone on the Net claims to have checked a company out and appears to be vouching for its legitimacy. Remember, these people are strangers. Where you money is concerned, you must do your own checking. Verify information through an independent source.
  • Verify the identity of people with whom you deal on the web. Don't give your money to strangers. Make sure they are who they say they are. Question why persons hyping investment products are doing so. Is there an undisclosed relationship between the promoter and the company?

Contact the Iowa Securities Bureau at 515/281-5705 or write to:

Iowa Securities Bureau
601 Locust St. - 4th Floor
Des Moines, IA 50309-3738

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