July 2000

What's New in Finances

Beware of online stock scams

7/1/2000 -

Stock scam artists are slithering out of boiler rooms and onto the Internet in increasing numbers. Once in cyberspace, they can reach huge pools of potential victims at a relatively low cost.

One of the most common Internet stocks frauds is a tactic called "pump and dump." In the scheme's simplest form, con artists buy a block of cheap or worthless stock and hype it on the Internet with lies and misrepresentations. The hype starts a buying frenzy, which inflates the stock's price far beyond its value. The promoters sell their shares at the peak of the frenzy, making a handsome profit. As the price recedes to normal, the investors are left holding stock worth next to nothing.

Bad investments can be hyped on the Internet in any of the following ways:

• Promoters buy e-mail address lists (often for less than one-tenth of a cent per name) and send fraudulent sale pitches to everyone on the lists.
• Using various aliases, promoters tell grandiose lies about their stocks in chat rooms and post phony tips on message boards.
• Some schemers create promotional web pages, complete with fake press releases. The pages may include links to legitimate web sites to provide an aura of credibility.
• Con artists may even create their own online newsletters, or pay other online newsletters to publish glowing reports about the stock.

Although the Securities and Exchange Commission (SEC) and other regulators are policing the Net more closely, most of their efforts are concentrated during the day. Many online hustlers simply work later to avoid unwanted attention. With the extension of electronic trading hours, a stock can be pumped and dumped in the course of an evening.

Although pump and dump is the most popular Internet stock fraud, it's not the only one. Sometimes a stock being hyped may not exist at all. In exchange for their money, investors receive worthless pieces of paper -- or absolutely nothing.

For safety's sake, get more information before acting on any "hot" stock tip. Seek a second opinion or take time to do additional research. If the promoter insists there's no time  to investigate, walk away. You've almost surely uncovered a scam.