Securities fraud:
Millions of investors are signing on to the Internet to obtain investment information and to execute trades. Unfortunately, on the other hand Internet also has opened new avenues for fraud artists to attempt to swindle the investing public. This is because the Internet offers perpetrators of securities fraud a medium to commit their crimes that is speedy, cheap, easy to use, and relatively anonymous. For the most part, there are three categories of securities frauds that have been encountered online by law enforcement.
Market Manipulation - This category of fraud most often involves attempts to artificially inflate a stock’s price by creating demand for thinly traded lower-priced securities. The manipulators create the demand through the dissemination of false and misleading information, such as phony announcements pertaining to strategic alliances, future earnings, mergers, or other important corporate developments. The Internet has proven to be fertile ground for such manipulations, because information can be disseminated with the simple click of a mouse to millions of users via websites, newsletters, spam, message boards, and other Internet media. The manipulator normally owns shares in the company’s stock and sells during the run-up that the manipulator creates. This fraud is commonly known as a “pump-and-dump” scheme. The Pair Gain case discussed at the beginning of this report is an example of a market manipulation case.
Offering Frauds - These cases generally involve either false or misleading offerings of securities. Falling into this category of cases are pyramid and Ponzi schemes, and affinity frauds targeted at specific racial, ethnic, or religious groups. In addition, there have been numerous fraudulent offerings of non-traditional securities over the Internet, such as offerings for “prime bank” programs and other esoteric securities, including interests in eel farms, coconut plantations, and fictional countries. Persons offering these securities often violate the law by failing to register as broker-dealers.
Illegal Touting - This type of securities fraud takes place when persons are paid to hype a company’s stock without making legally required disclosure of the nature, source, and amount of their compensation. This disclosure is necessary because investors have a right to know whether information they are receiving is objective or “bought and paid for.” The SEC has brought two Internet touting “sweeps” charging a total of 57 individuals and companies.
These three categories are not exhaustive. There are other securities law violations taking place on the Internet, including unregistered offerings of securities as well as broker-dealer registration violations etc.
