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Online Scams

Subject: No risk investments!!!
Do I have some good news for you! I have just finished completing my brand new, state of the art ONLINE TRADING PROGRAM, and now I’m offering you the opportunity to be a part of this once in a lifetime, no risk initiative. My program gives you the power to pick the stocks that will sky-rocket in the future, ensuring that you will make huge returns on your investments. We guarantee that you will not lose anything. All you need to do to be a part of this is send a $500 deposit to me today to secure your place. Be quick, as places are limited!


We’ve all received scam emails like the example above. While the internet is full of useful tools and research functions for investors, the lack of regulations has allowed the number of fraudulent scams to flourish.

In this lesson we will look at several examples of investment fraud that are taking place online. We will discuss how these scams work and how they can be avoided.


Types of Online Scams

Many of the scams that we are now seeing online are nothing new. Many of them existed in the past in slightly different formats as mail, telemarketing, and door-to-door sales. The internet has further complicated these schemes and added another dimension making it much easier for scammers to create the illusion of a reputable company by setting up a fancy website.

Examples of some of the most successful online investment scams are outlined below:
  • Ponzi Scheme - This is a scam in the format of a pyramid scheme; money invested by new people joining the program is used to pay previous investors. These schemes collapse when the money owed overtakes the money raised. These schemes always fail.
  • Pump & Dump - This scam involves a small group of investors who work together to purchase a specific stock and recommend purchasing it to thousands more investors. This recommendation means that the stock price rises suddenly and experiences a rapid downfall. The original group of purchasers sells the stock at its peak price and makes a huge profit. The shares recommended in pump and dump schemes are generally over the counter bulletin board companies with a small float. These stocks have higher levels of volatility and their values are easier to manipulate because of the limited public information about the company. These schemes are highly illegal. Another version of this scam is the “short and distort” which involves fraudsters spreading negative information about a company in order to drive down the stock price. They make a profit by short selling.
  • Off Shore Investing - These scams are specifically designed to take advantage of investors from North America (Canada and the United States). The internet has made it much easier for fraudsters to target North American citizens because it removes a lot of the previous barriers; different time zones, currencies, and expensive communication methods. Investors should be very careful when investing in foreign countries. The local law enforcement agencies in your country will find it very difficult to take legal action against foreign criminals.
  • Prime Bank – “Prime Bank” is the term used for the top 50 banks throughout the world. These banks buy and sell financial instruments with high returns and low risk, including International Monetary Fund bonds, world paper and Federal Reserve notes. Fraudsters will often use the phrase “prime bank” in an attempt to make their scam seem more legitimate. One way they accomplish this is by saying that they will use the investors’ money to purchase “prime bank” instruments for profit. In reality, these instruments are often fictitious and the investors lose their money.


Bulletin Boards

Online bulletin boards (usenet, newsgroups and web-based boards) have become very popular. There are now hundreds of them and people use them to post whatever type of information they want. The bigger bulletin boards (including Yahoo! Finance, Silicon Investor and Raging Bull) receive thousands of new messages each hour. While these posts can often be useful, many of the tips posted online end up being bogus. Pump and dump schemes often take place on bulletin boards as fraudsters post comments disguised as inside information about a particular company. Fraudsters may also spread negative information about a company on bulletin boards in order to manipulate the market prices.

The most dangerous aspect of bulletin boards is the anonymity. Peoples’ identities are hidden and there is no way of knowing how credible the people are. Posters may claim to be unbiased investors who have spent a lot of time researching a company, when in reality, they are actually people working for the company, shareholders, or they are being paid to promote the company. One person can generate the illusion that a stock is receiving a lot of attention by using several different aliases.

After the dotcom boom, there was a dramatic reduction in the amount of traffic visiting bulletin boards. Investors came to realize that not everything they read online could be trusted. This doesn’t necessarily mean that bulletin boards never contain anything valuable. One example of the complicated use of bulletin boards was the information posted online before Enron collapsed. Some online posts revealed the fraudulent behavior of the company, while others claimed that Enron would continue to perform well. A problem occurs because it is very difficult to distinguish the valuable information from the fraudulent posts.


Newsletters

Most online trading websites provide interested people with a regular newsletter containing useful insights about the market and stocks that are expected to perform well in the future. Some of these newsletters are very good; others are simply designed to promote particular stocks and are not actually “unbiased” at all.

Many companies will also hire people for the specific purpose of promoting their stock in online newsletters. This is not illegal, but according to federal securities legislation, newsletters are required to disclose who they have been paid by and how much. Many of the fraudulent newsletters do not provide this information about their payment sources accurately. They may lie about their income sources; whether or not the content is independent; and the historical results of their investment strategies. This is done to persuade investors to trade in a certain way with particular stocks, so that they can make a profit. Newsletters also rely on the pump and dump scheme. If a lot of people read the newsletter, this can be an effective way to manipulate the prices of small stocks.

Another common fraud method is junk e-mail, also known as “spam”. Because emails are free, this has become a very popular choice for a lot of fraudsters. Spam emails will often offer a “get rich quick” idea with “guaranteed results”. If you don’t know the sender or if the message comes from a generic address (such as wise investing) it may be a scam. Professional traders and brokers will not give away their trade secrets to anyone for free. Reputable companies are not going to spam email recipients in an attempt to generate publicity. The best thing to do if you receive one of these spam emails is to delete them immediately.

It’s not always difficult to identify spam emails. They usually go overboard with what they are promising (“amazing results with no risk”) and they will often use a lot of capital letters and exclamation marks. They may also be sent from web email accounts such as hotmail or yahoo. Spammers can easily open an account with these addresses to hide their identities.

What to do about Investment Scams If you have been the victim of online investment fraud, you should report it to the Securities and Exchange Commission. You can do this online at www.sec.gov/complaint.shtml or write to them at:

Securities and Exchange Commission
Office of Investor Education & Assistance
450 Fifth Street, N.W.
Washington, D.C. 20549-0213

You can also forward any spam emails received, or fraudulent postings on message boards that you come across, to enforcement@sec.gov

You can make your contact with the SEC anonymous if you prefer. You don’t need to give them any of your personal information; however, in some cases they will be able to better assist you if you give them more information. They will generally need to know how the fraud occurred, when, why and the contact information for the person or company that you are reporting.


Copyright © 2011 by Mark McCracken , All Rights Reserved