Financial Ripoffs: Con Artists Peddle Their Wares Online

Larry Cook has seen the future–and it is scary. As scam artists move from telemarketing rooms onto Internet sites to peddle their wares, he worries about technology's darker side.

As director of the enforcement division in the office of the Kansas Securities Commissioner, Cook spends his days investigating pyramid schemes, sales of phoney gold mines, and other investment rip-offs. So far, most victims of fraud are bilked out of their money by phone or in person. But that's likely to change, as more and more people venture out into cyberspace.

For criminal types, the Internet offers anonymity and economies of scale. With a Web page or online discussion group, "You can reach hundreds of thousands of people at minimal cost," says Cook.

That's today. But as technology improves and Internet commerce takes hold, the time will come when you, the vulnerable consumer, can instantly respond to bogus online offers. "With a few mouse clicks you'll be into your bank account, you can send off the money, and there's no cooling-off period. You're looking at impulse buying with no audit trails," says Cook.

Changing demographics are another ominous sign. Con artists often prey on the elderly, and Web surfers–at least up to now, have been overwhelmingly young and male. But according to a recent survey by New York-based Nielsen Media Research and CommerceNet, a Palo Alto group, over seven million people ages 50 to 74 now use the Internet. That's twice as many senior surfers as there were a year ago.

Log on to an unmoderated financial discussion forum, and you're apt to find offers like this one:
"Be a billionaire in 10 years: Invest in an online record company."

Here's another one:
"Currently seeking investors for both feature film and television projects. Take part in this amazing industry where return on your investments may have no limit. No minimum investment required, all offers will be considered. Reply via e-mail."

People can post pretty much anything they want on an unmoderated Internet discussion group–and they often do. And even though the Securities and Exchange Commission (SEC), Better Business Bureau (BBB), Federal Bureau of Investigation (FBI), Federal Trade Commission (FTC) and some state agencies have begun to monitor abuses, you need to proceed with caution.

"The difficulties of investigating fraud on the Internet are enormous," says William McDonald, assistant commissioner of the California Department of Corporations. "People need to understand that it is a frontier and that it is largely unregulated."

Not surprisingly, Ponzi schemes, named for 1920s swindler Charles Ponzi, are making a comeback. In this type of scam, people invest their money and are paid back out of the money kicked in by new investors. Eventually the supply of new investors runs out–and so does the cash.

Last April, federal prosecutors indicted the owner of a Burbank, Calif. escrow company and three of his cronies for bilking 1100 people out of more than $100 million. Investors who bought shares in Personal Choice Opportunities (PCO) were promised annual returns of up to 25 percent. Victims were told that PCO was buying insurance policies from terminally ill patients at a discount when, in fact, no policies were ever purchased. Instead, PCO used money from new investors to pay previous investors and pad the bank accounts of PCO owner David W. Laing. To promote this scam, PCO used newspaper ads, financial advisors and the Internet.

Another type of Internet fraud involves manipulating stock prices. "The word is out on the street that stock information posted over a bulletin board system (BBS) or Internet forum can, within minutes of a posting, influence the price of a stock," says John Reed Stark, special counsel for Internet projects at the SEC's division of enforcement.

Promoters of thinly traded, over-the-counter stock can pump up its value by posting on message boards, sending bulk email, and shmoozing in chat rooms. And in the anonymous world of the Internet, what's to prevent the owners of a company from concealing their identity and hyping their own stock?

Bilking investors is an old established sport. But with the rising bull market and stocks enjoying all-time highs, "Swindlers are becoming more creative in how or they steal people's money," says North American Securities Administrators Association (NASAA) President Mark J. Griffin.

Investment fraud is spreading to new fields–as hucksters peddle partnerships in Internet shopping malls and Internet service provider firms to the unwary. To skirt registration and securities fraud laws that apply to stocks and bonds, unscrupulous operators are setting up so-called general partnerships and limited liability corporations. Often these are shell companies, explains Robert Friedman, a senior attorney for the FTC's Bureau of Consumer Protection.

One such scheme involved a firm that promised to unveil an Internet shopping mall for live, online shopping in a format comparable to TV's shopping channels. Despite projected earnings of 600 percent a year, investors in the partnership were left holding essentially worthless stock certificates and no shopping mall whatsoever.

Now that get-rich-quick information is as close as your nearest computer node, it obviously pays to be careful. Several regulatory agencies have established Web sites that offer basic advice on avoiding scams. These include the SEC (http://www.sec.gov), the FTC (http://www.ftc.gov), and the National Fraud Information Center (http://www.fraud.org) .

Also, keep in mind the following caveats:

• If an offer sounds too good to be true, it probably is.
• Watch out for pitches that promise big profits in short time frames, claim that no risk is involved, or tell you to act now.
• If you're seeking investment advice in an online chat room or bulletin board, never rush into anything. Lurk before you leap. It takes a while to understand the biases of the people offering advice, and to assess the quality of what they're saying.
• If you're unsure about an investment or personal finance decision, seek the offline opinion of a professional. This might be your lawyer, CPA, tax adviser, or financial planner.
• Be alert for conflicts of interest. How do you know that the person extolling the virtues of Company ABC isn't the president's son?
• Be cautious about firms offering partnerships. Fraudulent promoters often structure deals to siphon off most of the investors' money. It often turns out that they never intended to turn over a functioning business in the first place.
• Before you buy, check out the company with your state securities regulator, the BBB, and the attorney general's office to find out if it's registered to sell investments in your state. Find out if any complaints have been lodged against it.
• Never invest in anything you don't understand. Don't take the seller's word for anything. If you find an online investment idea that appeals to you, do your homework offline. If copious research reports make your eyes glaze over, perhaps it's time to seek the advice of a financial professional.

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