The Internet is a great tool for everyone, including investors due to
the response speed, and the amount of information that is exchanged.
Transactions are executed very quickly, with the click of a button or a
few keystrokes. However, the Internet is also another avenue for fraud.
Investors must use caution and common sense when using the Internet for
securities activities.
The fact that information appears on the Internet does not render
additional credibility to the information. Be especially wary if the
identity of the source is not identified.
Over the Internet, investors can purchase securities of a company
directly from the company. Treat the online transaction as you would a
regular investment, and make sure that the securities are registered or
exempted under both federal and state law.
Alternatively, investors can trade securities through online brokers.
Study and understand the terms, conditions and costs of these services,
before you use them. Brokers must be licensed, and must be registered
with the Securities Exchange Commission.
Finally, be very careful with information you gather from a “chat
room.” It is in these “chat rooms” that persons posing as credible
sources send out information to “pump” the price of a stock. Once the
price of this stock has increased, they “dump,” or sell their stock at
a great profit. These are called “pump and dump schemes.”
Steering Clear of Cyber fraud
The following steps, according to North American Securities
Administrators Association (NASAA) and the Better Business Bureau (BBB)
can help you keep on guard when you go online.
1. Do not expect to get rich quick – When evaluating an investment you
have learned about online; exercise the same caution and deliberation
that you would bring to any unfamiliar investment opportunity. The old
rule “If it sounds too good to be true, it probably is” applies just as
much to offers made in cyberspace as to those made through any other
medium.
2. Download and print a hard copy of any online solicitation you are
considering – This document may come in handy if problems develop
later. Be sure to note the Internet address, date, and time of the
offer.
3. Do not assume that an online computer service polices its investment
bulletin boards – The vast majority of services take a “hands-off”
approach to screening claims made in message postings, and even those
that do minimal policing cannot possible keep up with the millions of
messages posted each month. Remember, too, that anyone can set up a web
site or advertise online, usually without any check on the legitimacy
of their claims.
4. Never buy little known, thinly trade stocks strictly based on online
hype – Low-volume stocks are the most susceptible to manipulation since
their price can be moved through relatively small strategic trades.
Even if a hyped stock starts to move up, proceed with caution – this
may just be part of the overall manipulation scheme.
5. Be cautious about acting on the advice of individuals who hide their
identity – The use of aliases on computer bulletin boards is intended
to protect privacy, but con artists also can exploit it. People online
may not be whom they claim. What may seem to be two or more different
people talking up a stock may actually be a single individual with a
personal interest in driving up its price through false information or
baseless speculation. In addition, an impressive-looking website can be
the product of a laptop computer on the other side of the world, far
from the jurisdiction of U.S. law enforcement regulators.
6. Do not get taken in by claims of “inside information” such as
pending news releases, contract announcements, and innovative new
products – In cyberspace, practically anyone can say anything. Despite
the abundance of “hot tips” littered across bulletin boards and
discussion groups, it is extremely unlikely that genuine insider
information will be publicly broadcasted on an investment bulletin
board.
7. Be skeptical about claims that an online stock hypester has
personally checked out an investment – One established tactic of
investment schemers is to talk up companies, mining operations, and
factories in remote corners of the country or the globe, where it can
be impossible for the average investor to investigate or visit in
person.
8. Take the time to investigate outside sources of information on any
investment you learn about online – Check with a trusted financial
adviser and always obtain written financial information, such as a
prospectus, annual report, offering circular, and financial statements.
Ask the online promoter where the firm is incorporated, and call the
state’s Secretary of State or Commissioner of Securities to verify that
information. Also, make sure that an investment opportunity and the
person promoting it are properly registered with your state securities
agency. In Hawaii, the agency to contact is the Business Registration
Division of the Department of Commerce & Consumer Affairs.
9. If you think you have been duped, do not be embarrassed about
complaining – Early action increases your chances of getting your money
back and may prevent others from losing money. If you spot a potential
online investment fraud, contact your state securities administrator,
Better Business Bureau (808) 942-2355, or The Federal Trade Commission
(415) 356-5270.
