Forensic Accounting
Brand Protection
Computer Forensics
Corporate Investigation

Volume 8 - No. 1                    Download PDF

In this edition of 
The Kessler Report:

Staying a Step Ahead of Stock Scams

Boiler Rooms Go
High-Tech: Online Investment Fraud

Signs You're Dealing With a Smooth Criminal

Web Monitoring Firms: Far Reaching or Far-Fetched?

Non-Compete Agreements: The Extra Step in Intellectual Property Protection

Q&A: Theft in the Workplace

Kessler's Corner:  Investment Fraud

FYI: Operation
Brand Aid

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Boiler Rooms Go High-Tech: Online Investment Fraud

Less than a decade ago, when the Internet was a fairly new and strange arena for most people surfing with a 14.4 modem connection through a local ISP, stock trades were handled the old-fashioned way.  Phone calls and handshakes still dominated the Wall Street community, and at the time, investment fraudsters were limited by how many phone calls they could make, and how often they could evade the long arm of the law.  Running such operations required a great deal of cash.  Office space, long-distance and international phone charges, and the hiring of employees made such scams financially risky.  

However, the infamous "tech bubble" of the late-90s brought many white-collar criminals out of their boiler rooms and in front of their own home computers, as online trading took off.  In 1994, not a single trade was done online, but by the turn of the century, millions of investors had logged on, looking for a way to capitalize on the booming market.  Now, despite a somewhat lagging U.S. economy, Internet trading is bigger than ever, and for a new generation of fraudsters, the sky is the limit.  In fact, Internet stock fraud has become one of the top enforcement problems for the Securities Exchange Commission.  

The worldwide reach of the Internet allows firms and individuals alike to communicate with a very large audience without the effort or costs inherent with a traditional boiler room operation.  Anyone can reach thousands of potential customers with the click of a button.  Websites, message boards, online newsletters and spam (junk e-mail) can all deliver the same message that used to require cold calling from a dingy office filled with dozens of phony brokers, and it can all be done from the comfort of home.  Scammers can easily make their hype look professional and credible, but many investors can't tell the difference between what's legit and what's an outright hoax.  

Frauds, Frauds, Everywhere!
The Internet, being essentially unregulated, is not only a place for the exchange of ideas, information, entertainment and commerce, but it is also an immense playground for high-tech crooks, and investment scams amount to only a small fraction of criminal activity perpetrated on the Web. Thankfully, if you know what the frauds are and where they are located, you may be able to protect yourself from joining a list of very unhappy traders.  

Types of Online Frauds
The Internet allows for much more exposure, and the digital medium makes it easy for scammers to get their messages out to the public, but the meat-and-potatoes of stock scams are basically the same, whether it's on the phone or online.  

One of the most common types of investment frauds is the "Pump and Dump" scam.  In this scheme, the stock for a company (usually a small, thinly-traded company) is hyped and promoted incessantly by fraudsters.  Perhaps phony press releases show up on a company's website or an online newsletter, glowing about the company's financial success or exciting future prospects.  Message boards and mass e-mails tout the company as a hot stock, urging people to invest as quickly as possible.  Investors unwittingly buy up the stock, pumping up the price as the demand increases.  Of course, once the stock price has hit its peak, the people behind the scheme sell off their shares, stop hyping the company, and laugh all the way to the bank while investors can do nothing but watch their worthless stocks plummet in value.  

The classic "pyramid" scheme is another fraud that has made its way to the Internet.  Surely everyone has received e-mails declaring that you can get rich in just weeks working from your home computer.  An intriguing promise, but the scam is basically nothing more than people trying to earn money by recruiting new participants into the program.  No actual opportunities, just a continuous loop of deceit.  

"Risk-free" opportunities are also regularly offered on the Web.  No investment is risk-free, and while many of these offers sound interesting or exotic (an eel farm being one of the most notable), they are dead-ends and most of the so-called businesses don't even exist.  If an opportunity sounds too good to be true, it probably is.  

Offshore investments are another red flag for fraud.  Offshore schemes targeting U.S. investors used to be relatively expensive and hard to execute, but thanks to the Internet, obstacles such as calling costs, differing currencies and time zone conflicts have been removed.  It is important to look at any foreign solicitation with a wary eye, since it is very difficult for U.S. authorities to investigate frauds that originate in other countries.  

Methods of Distribution
Thanks to the versatility of the medium, Internet investment frauds are relatively simple to create and easy to distribute.  Most often, they are found in online newsletters, bulletin boards and spam e-mail.  

Online investment newsletters are quite common within the Internet finance community.  The newsletters often offer stock tips and opinions of experienced Wall Street veterans… or so it would seem.  While legitimate newsletters may be helpful to investors, many of these publications are home to scams.  For example, some companies pay newsletters to hype or recommend their stocks.  While this activity is not illegal, federal law requires these newsletters to disclose the company that paid them, how much they paid, and what type of payment was made.  However, fraudsters lie about the payments, and end up profiting when investors buy the highly-touted stocks.  

Fraudulent online newsletters may also offer completely baseless claims concerning particular investments, promoting worthless stocks or spreading false information about certain companies.  Sometimes they even "scalp" the stocks they're promoting, driving up the price and selling off their own shares to investors when the price is high enough.  

Bulletin boards, also called message boards or forums, have become popular in every web community, including white-collar criminals.  The boards basically allow users to post anything they like under any alias they wish.  Fraudsters can easily reach thousands of investors this way, posting false information and hyping (or trashing) certain stocks, all while remaining totally anonymous.  

Spam, which has itself become the bane of many Internet dwellers and business owners, not only delivers unsolicited pornography or messages about its recipients' physical inadequacies, but often contains information about "get rich quick" schemes that many people fall victim to.  Spam allows fraudsters to target a much larger audience than cold calling or mass mailing ever could.  E-mails can be sent out to thousands, even millions of people at a time.  And while most people filter or delete such junk mail from their inboxes, there are a small percentage of curious investors who may check out the fabulous money-making opportunity, and that's enough to line the pockets of cyber-criminals.   

Online trading has certainly taken Wall Street by storm over the last few years, and with the continued success of online operations, there appears to be no end in sight for such services.  Most investors are embracing the change, but with change comes a good deal of risk.  Honest people must learn to invest wisely and stay away from those frauds that promise to turn five bucks into $50,000.  Investors should never make an investment based solely on a hot tip exchanged on the Internet, or a promise made in a flashy e-mail message.  Investors should also avoid buying stock in small, thinly-traded companies unless they have done extensive research, and the company in question files financial reports with the SEC.  

Yes, online trading has indeed arrived, and it will likely be the future standard.  Just make sure you don't get caught up in the glitz of technology and allow some scheming student to bilk you out of your life savings.  Before you make what you think is a sound investment, call Kessler International and ask for some insight into that "once in a lifetime" opportunity.  You'll be glad you did.

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