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E-mail scams that snag investors

At a time when tales of corporate accounting shenanigans fill the headlines, e-mail stock scams may not be at the forefront of investors’ minds. But experts say the practice is still a growing menace.
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At a time when tales of corporate accounting shenanigans fill the headlines, e-mail stock scams are not at the forefront of investors’ minds. But experts say the practice of bilking gullible Internet users out of thousands of dollars is a growing menace.

Junk e-mail floods our in-boxes every day, and in many cases the messages are pitches for phony health-care products, chain letters, pyramid schemes or ads for pornographic Web sites.

And some are fraudulent stock offerings, usually touting the shares of companies that trade on the Pink Sheets — an over-the-counter market that does not require firms to meet any listing requirements or to file periodic reports or audited financial statements.

These stock scams, no matter how unsophisticated, still snare hundreds of naive investors a year. And although it’s hard to pin down specific numbers given the inexact nature of the problem, an informal survey of experts in the field reveals a growth in activity.

Last month, for example, the U.S. Securities and Exchange Commission (SEC), the securities industry’s watchdog, charged two companies — Discover Capital Holdings and Indianapolis Securities — with using spam e-mail and misleading, high-pressure sales calls to raise $1.1 million from 19 investors through the sale of private-placement shares.

The two firms tricked investors into thinking shares of Discover Capital were on the rise by creating a market for the common stock at artificial prices, according to an SEC report.

The alleged scam is one of more than 400 Internet enforcement actions that the commission has brought against entities and persons in the last five years, according to John Reed Stark, director of the SEC’s Office of Internet Enforcement, an arm of the SEC established in July 1998 to combat online securities fraud.

The division now receives about 1,000 e-mail complaints daily about online stock frauds and other securities violations, said Stark, and lately the number of complaints has escalated — an indication that the volume of deceptive e-mail is growing, he noted.

“We’ve definitely seen more complaints come in recently, but it’s hard to determine the cause,” said Stark, adding that there may be a number of reasons for the growth, including a five-month rise in stock prices.

“But we have seen increases in bad markets too, because people are eager to recoup their losses. And when the stock market is doing well people tend to let their guard down a bit,” he said.

“The reality is it’s getting easier to send spam because the costs are dropping,” Stark continued, giving as an example a 20-year-old Kentucky man, K.C. Smith, who early last month pleaded guilty to sending out more than 9 million junk e-mail messages as part of a business scheme that defrauded investors out of over $100,000.

Bump in stock-related mail
Cam Funkhouser, senior vice president of market regulation at the National Association of Securities Dealers, a self-regulatory organization that oversees 5,300 U.S. brokerage firms, has also noticed a “mild bump” in the number of stock-related e-mails of late.

Funkhouser, who monitors share-trading activity and compares it to stock-related spam e-mail and company news releases, says a worrying trend is the growth in the number of fraudulent touts for firms involved in areas like SARS, anthrax or AIDS.

One recent case, brought by the SEC against Quintek Technologies and Panamed, was related to false and misleading statements concerning “clinical trials” of Panamed’s AIDS product. The SEC sued the two firms last week.

Even if only a small percentage of the population responds to a bogus e-mail message, the rewards can be lucrative, said Funkhouser. But while the number of stock-related e-mails is increasing, their influence on the stock market is diminished, according to the SEC’s Stark.

“Instead of a stock price going from 10 cents to $15 it’s going from 10 cents to $1, but that’s still a significant gain for the spam artist,” Stark said.

Many stock schemes are primarily targeted at retirees and the elderly, and this segment may be more vulnerable to Internet-born stock scams noted Roy Green, a senior legislative representative for the American Association of Retired Persons, or AARP.

Green points to data from the Internet Fraud Complaint Center (IFCC), a partnership between the FBI and the National White Collar Crime Center.

In its 2002 report on fraudulent practices on the Internet, the IFCC said investment fraud ranks fourth on the list of ten complaints, although it only makes up 1.5 percent of the total, compared to 46.1 percent for auction fraud and 31.3 percent for non-delivery of goods — the first and second most reported complaints in the survey.

Green points out that the data may mask a greater problem. As older Americans with greater accumulated wealth become more comfortable using the Internet they are more likely to be targeted by Internet stock scams.

“Many older Americans have lost a significant amount of money in their retirement accounts, so they are looking for ways to recoup losses,” Green added. “This is a serious issue and I don’t think we have our arms around it yet.”

The Associated Press contributed to this report.