The greater accessibility of the internet has brought a number of benefits to
investors: real-time access to company information, and less expensive stock
trades through on-line brokers (just to name two). However, the internet has
also proven to be an effective tool for perpetrating securities fraud. The
types investment opportunities that have been fraudulently offered over the
internet run a spectrum of business enterprises that seem to be limited only by
a perpetrator's imagination. Such securities offerings have been made in
everything from transactions in foreign currency and investments in virtual
(on-line) casinos, to securities in Costa Rican coconut plantations and
eel farms . Almost every conceivable communication method offered by the
internet has been used to defraud investors including unsolicited "spam" e-mail,
web pages, web discussion forums, chat rooms, news groups, and on-line news
letters. It has been estimated that internet-related stock fraud is the
second most common form of investment fraud, costing investors approximately $10
billion per year. The frauds being perpetrated on the internet, the making
of material misstatements or omissions to induce investors to purchase
securities, are the same as those which have existed since the passage of the
first federal securities laws nearly 80 years ago. The internet is simply a new
vehicle with which to perpetrate these frauds.
The opportunity to violate securities laws on the internet is not limited to
issuers. Even common stockholders can opt to violate the securities laws by
using the internet to manipulate the markets. The key to market manipulation is
causing enough investors to buy the target company's stock by disseminating
false information to artificially inflate the stock price. The manipulator then
sells his own stock at the inflated price before the market realizes that the
information is false. The investors who bought based on the false information
often lose a substantial amount of the money they invested. Market
manipulation often targets what are termed "microcap" stocks, these are
generally securities in thinly capitalized companies which are traded
over-the-counter. Their low price, small trading volume, and scarcity of issuer
information, make the price of microcap stocks easier to move up or down. The
internet has become an effective tool for market manipulators as it allows them
to disseminate false information about a company to massive numbers of investors
quickly, easily, and at negligible cost.
The ease with which the internet allows almost anyone to manipulate the market
was demonstrated by Jonathan Lebed. Lebed, using a number of fictitious names,
and employing hundreds of internet postings and mass e-mails to disseminate
false information about and inflate the price of nine different stocks, made
over $272,000 by selling his own shares at the inflated prices. Using the
fictitious names, he was able to pose as hundreds of different independent
investors, making the false information he was circulating more credible, the
entire time concealing that he was only one person, and, most stunning of all,
that he was only a 15-year-old high school junior.
In 1989 the SEC (Securities and Exchange Commission) created the Office of
Internet Enforcement to deal with the special challenges encountered in
combating securities fraud perpetrated via the internet. The office is
proactive, performing internet surveillance searching for securities fraud, and
executing coordinated nationwide internet-related securities investigations and
prosecutions targeting specific types of violations, termed "enforcement
sweeps." The office has also utilized the public in combating
internet-related securities fraud by educating the public about identifying and
avoiding on-line frauds and has set up a complaint center where members of the
public can report possible securities violations.
The SEC also coordinates its efforts with other federal and state agencies,
including the US Department of Justice, the Federal Bureau of
investigation, the Federal Trade Commission, the US Secret Service, and
regulatory agencies of individual states. The problem of internet-related
securities fraud is being independently addressed by state regulatory agencies
as well. The California Department of Corporations, for instance, has its own
Internet Enforcement Division. The problem is also being addressed by
self-regulatory organizations such as the New York Stock Exchange, the National
Association of Securities Dealers, and the North American Securities
Administrators Association, which coordinate efforts with federal and state
regulators.
