Tags: online | scams

As Recession Looms, Investment Scams Soar

Friday, 25 Jan 2008 08:01 AM

By Bruce Mandelblit

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Congress and the president are planning a multibillion dollar tax rebate to help prevent, or at least mitigate, a recession. The ongoing housing slump is a crisis in many parts of the country. And the stock market shows incredible day-to-day volatility.

As the average American plans for a potential economic slowdown, or even a recession, Internet criminals have a slew of investment scams ready to go as they attempt to rip-off hard-working folks of their hard-earned dollars.

According to the Securities and Exchange Commission (SEC), the following are some of the possible ways cyber-muggers may use to try to swindle Americans:

1. Online Investment Newsletters: Hundreds of online investment newsletters have appeared on the Internet in recent years. Many offer investors seemingly unbiased information free of charge about featured companies or recommending "stock picks of the month." While legitimate online newsletters can help investors gather valuable information, some online newsletters are tools for fraud.

Some companies pay the people who write online newsletters cash or securities to "tout" or recommend their stocks. While this isn't illegal, the federal securities laws require the newsletters to disclose who paid them, the amount, and the type of payment. But many fraudsters fail to do so.

Instead, they'll lie about the payments they received, their independence, their so-called research, and their track records. Their newsletters masquerade as sources of unbiased information, when in fact they stand to profit handsomely if they convince investors to buy or sell particular stocks.

Some online newsletters falsely claim to independently research the stocks they profile. Others spread false information or promote worthless stocks. The most notorious sometimes "scalp" the stocks they hype, driving up the price of the stock with their baseless recommendations and then selling their own holdings at high prices and high profits.

2. Online bulletin boards — whether newsgroups, Usenet, or Web-based bulletin boards — have become an increasingly popular forum for investors to share information. Bulletin boards typically feature "threads" made up of numerous messages on various investment opportunities.

While some messages may be true, many turn out to be bogus, or even scams. Fraudsters often pump up a company or pretend to reveal "inside" information about upcoming announcements, new products, or lucrative contracts.

Also, you never know for certain who you're dealing with because many bulletin boards allow users to hide their identity behind multiple aliases.

People claiming to be unbiased observers who've carefully researched the company may actually be company insiders, large shareholders, or paid promoters. A single person can easily create the illusion of widespread interest in a small, thinly-traded stock by posting a series of messages under various aliases.

3. E-mail Scams: Because "spam" — junk e-mail — is so cheap and easy to create, fraudsters increasingly use it to find investors for bogus investment schemes or to spread false information about a company. Spam allows the unscrupulous to target many more potential investors than cold calling or mass mailing. Using a bulk e-mail program, spammers can send personalized messages to thousands and even millions of Internet users at a time.

4. Online Investment Fraud: The types of investment fraud seen online mirror the frauds perpetrated over the phone or through the mail. Remember that fraudsters can use a variety of Internet tools to spread false information, including bulletin boards, online newsletters, spam, or chat (including Internet Relay Chat or Web Page Chat). They can also build a glitzy, sophisticated web page. All of these tools cost very little money and can be found at the fingertips of fraudsters.

Consider all offers with skepticism. Investment frauds usually fit one of the following categories:

  • The “Pump and Dump” Scam: It's common to see messages posted online that urge readers to buy a stock quickly or tell you to sell before the price goes down. Often the writers will claim to have "inside" information about an impending development or to use an "infallible" combination of economic and stock market data to pick stocks.

    In reality, they may be insiders or paid promoters who stand to gain by selling their shares after the stock price is pumped up by gullible investors. Once these fraudsters sell their shares and stop hyping the stock, the price typically falls and investors lose their money. Fraudsters frequently use this ploy with small, thinly-traded companies because it's easier to manipulate a stock when there's little or no information available about the company.

  • The Pyramid: Be wary of messages that read: "How To Make Big Money From Your Home Computer!!!" One online promoter claimed that investors could "turn $5 into $60,000 in just three to six weeks." In reality, this program was nothing more than an electronic version of the classic "pyramid" scheme in which participants attempt to make money solely by recruiting new participants into the program.

  • The “Risk-Free” Fraud: "Exciting, Low-Risk Investment Opportunities" to participate in exotic-sounding investments – such as wireless cable projects, prime bank securities, and eel farms – have been offered through the Internet. But no investment is risk-free. And sometimes the investment products touted do not even exist – they're merely scams. Be wary of opportunities that promise spectacular profits or "guaranteed" returns. If the deal sounds too good to be true, then it probably is.

  • Off-Shore Frauds: At one time, off-shore schemes targeting U.S. investors cost a great deal of money and were difficult to carry out. Conflicting time zones, differing currencies, and the high costs of international telephone calls and overnight mailings made it difficult for fraudsters to prey on U.S. residents. But the Internet has removed those obstacles. Be extra careful when considering any investment opportunity that comes from another country, because it's difficult for U.S. law enforcement agencies to investigate and prosecute foreign frauds.

    Remember, the Internet allows individuals or companies to communicate with a large audience without spending a lot of time, effort, or money. Anyone can reach tens of thousands of people by building an Internet website, posting a message on an online bulletin board, entering a discussion in a live "chat" room, or sending bulk e-mails. It's easy for fraudsters to make their messages look real and credible. But it's nearly impossible for investors to tell the difference between fact and fiction.

    For more information on these scams and frauds, plus tips on how to use the Internet wisely when investigating potential investments, go to the Securities and Exchange Commission website at www.sec.gov, and check with your trusted legal and financial advisors.

    My Final Thoughts: The classic maxim, “if it sounds too good to be true, it probably is” undeniably applies to virtually all online investment schemes. By following the SEC’s advice, and by using good-old common sense, you can make it much harder for these heartless thugs to try to steal you hard-earned dollars.

    Note: If you manufacture or distribute any security, safety, emergency preparedness, homeland defense or crime prevention related products, please send information on your product line for possible future reference in this column to CrimePrevention123@yahoo.com.

    Copyright 2008 by Bruce Mandelblit

    “Staying Safe” with Bruce Mandelblit is a regular column for the readers of Newsmax.com and Newsmax.com magazine.

    Bruce welcomes your thoughts. His e-mail address is CrimePrevention123@yahoo.com.

    Bruce is a nationally known security journalist, as well as a recently retired, highly decorated reserve law enforcement officer.

    Bruce writes "Staying Safe," a weekly syndicated column covering the topics of security, safety, and crime prevention.

    Bruce was commissioned as a Kentucky colonel — the state’s highest honor — for his public service.

    This column is provided for general information purposes only. Please check with your local law enforcement agency and legal professional for information specific to you and your jurisdiction.

    © 2014 Newsmax. All rights reserved.

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