Roanoke Times
Copyright (c) 1995, Landmark Communications, Inc.
DATE: MONDAY, July 18, 1994 TAG: 9407260033
SECTION: MONEY PAGE: 6 EDITION: METRO
SOURCE: By JANE BRYANT QUINN
DATELINE: NEW YORK LENGTH: Medium
Financial frauds stain the on-line bulletin boards and chat groups that investors plug into with their computers. Experienced investors generally spot them and stay away. But tyros may fall for the false promises and the hype.
Law-enforcement agencies try to keep an eye on the cybersells. At any given time, more than 5,000 messages on investment topics are posted on Prodigy, one of the major on-line services, said Jared Silverman, chief of New Jersey's Securities Bureau. Traffic like that can't be regularly policed.
When a broker or promoter makes false statements to snare your money, he or she normally reaches only one person at a time. But on-line, a promoter can reach hundreds of thousands of investors at once.
Furthermore, he or she can reach them anonymously. You can use nicknames in the computer chat rooms and on some (but not all) of the bulletin boards. On the Prodigy bulletin board, which requires real names, a new user still might get away with an alias at the start. Prodigy spokeswoman Carol Wallace won't reveal how long it takes to check on whether the user is who he says. But she adds that Prodigy is ``upgrading the verification system, to do it more quickly.''
Even so, Prodigy checks only the main user of the account - the person who will pay the bills. A main user can authorize several others to use his account, and the on-line service won't know whether those are aliases or not. Even when the names are true, the people reading the postings won't know whether they're dealing with a broker, a public relations firm, a company insider or an investor unless the sender of the message identifies his interest.
In a typical ``pump and dump'' operation, a promoter might buy up shares in, say, the Loser City Mining Co., traded at 25 cents a share on a small Canadian exchange. Calling himself ``Ferret,'' he might then drop a note on a bulletin board that Loser City is exploring for diamonds in Zaire. A confederate calling himself ``Traveler'' might claim that he has seen the new mine, talked to the foreman and knows it's a superior strike. These phony exchanges may appear on many different boards, so it seems that lots of people are talking up the stock.
Pretty soon, trusting readers start buying Loser City, more rumors swirl and the stock price soars to over $2. Within a month, the promoter takes his profits and runs. Then the stock collapses.
Many other types of suspect deals can be found on the bulletin boards. At the moment, law enforcement officials in at least seven states are investigating more than two dozen cases - including a phony commodities futures pool that a Texas retiree put more than $10,000 into and an investment adviser who greatly exaggerated her talents.
Four cease-and-desist orders were announced last week.
New Jersey issued orders against two illegal chain-mail schemes. Readers were supposed to send $1 each to the top five names on a 10-person list, add their own name to the bottom and zap the letter to at least 10 Prodigy bulletin boards. For an investment of around $6.45 (including the zap fee), they were promised a return exceeding $50,000 or $60,000.
The scheme claimed to be legal, because users were supposedly building a salable mailing list. No way, Jared Silverman said. New Jersey officials served orders on every name on the list.
Missouri issued two cease-and-desist orders against people touting unregistered stock in the Europa Cruise Corp. and in E.T.C. Industries of Vancouver, Canada. Florida broker Brian Kessler - self-identified as ``a good trader'' - told bulletin-board users that Europa Cruise had a $100 million deal with real-estate magnate Donald Trump, the order said. Kessler couldn't be reached for comment.
None of these cases involved fines. So erring in cyberspace hasn't been carrying much cost.
Cyberlaw has yet to be clarified. Do on-line investment recommendations get the same free-speech exemptions that newsletters and newspapers do? Are the systems operators liable for any false information that goes out? It hasn't even been decided whether a solicitation on a bulletin board amounts to an offer to sell in the state, although ``we would say it does,'' said Missouri Securities Division Director John Perkins.
Bottom line, however, is that on-line investment pitches are virtually unpoliced. There's no one to save you but yourself.
by CNB