The Internet allows individuals
or companies to communicate with a large audience without spending a lot of
time, effort, or money. Anyone can reach tens of thousands of people by
building an Internet web site, posting a message on an online bulletin board,
entering a discussion in a live "chat" room, or sending mass e-mails.
It's easy for fraudsters to make their messages look real and credible. But
it's nearly impossible for investors to tell the difference between fact and
fiction.
Online
Investment Newsletters
Hundreds
of online investment newsletters have appeared on the Internet in recent years.
Many offer investors seemingly unbiased information free of charge about
featured companies or recommending "stock picks of the month." While
legitimate online newsletters can help investors gather valuable information,
some online newsletters are tools for fraud.
Some
companies pay the people who write online newsletters cash or securities to
"tout" or recommend their stocks. While this isn't illegal, the federal
securities laws require the newsletters to disclose who paid them, the amount,
and the type of payment. But many fraudsters fail to do so. Instead, they'll
lie about the payments they received, their independence, their so-called
research, and their track records. Their newsletters masquerade as sources of
unbiased information, when in fact they stand to profit handsomely if they
convince investors to buy or sell particular stocks.
Some
online newsletters falsely claim to independently research the stocks they
profile. Others spread false information or promote worthless stocks. The most
notorious sometimes "scalp" the stocks they hype, driving up the
price of the stock with their baseless recommendations and then selling their
own holdings at high prices and high profits. To learn how to separate the good
from the bad, read our tips for checking out newsletters.
Bulletin
Boards
Online
bulletin boards - whether newsgroups, usenet, or web-based bulletin boards -
have become an increasingly popular forum for investors to share information.
Bulletin boards typically feature "threads" made up of numerous
messages on various investment opportunities.
While
some messages may be true, many turn out to be bogus - or even scams.
Fraudsters often pump up a company or pretend to reveal "inside"
information about upcoming announcements, new products, or lucrative contracts.
Also,
you never know for certain who you're dealing with - or whether they're
credible - because many bulletin boards allow users to hide their identity
behind multiple aliases. People claiming to be unbiased observers who've
carefully researched the company may actually be company insiders, large
shareholders, or paid promoters. A single person can easily create the illusion
of widespread interest in a small, thinly-traded stock by posting a series of
messages under various aliases.
E-mail
Spams
Because
"spam" - junk e-mail - is so cheap and easy to create, fraudsters
increasingly use it to find investors for bogus investment schemes or to spread
false information about a company. Spam allows the unscrupulous to target many
more potential investors than cold calling or mass mailing. Using a bulk e-mail
program, spammers can send personalized messages to thousands and even millions
of Internet users at a time.
How to
Use the Internet to Invest Wisely
If you
want to invest wisely and steer clear of frauds, you must get the facts. Never,
ever, make an investment based solely on what you read in an online newsletter
or bulletin board posting, especially if the investment involves a small,
thinly-traded company that isn't well known. And don't even think about
investing on your own in small companies that don't file regular reports with
the SEC, unless you are willing to investigate each company thoroughly and to
check the truth of every statement about the company. For instance, you'll need
to:
·
get financial statements from the company and be able to analyze
them;
·
verify the claims about new product developments or lucrative
contracts;
·
call every supplier or customer of the company and ask if they
really do business with the company; and
·
check out the people running the company and find out if they've
ever made money for investors before.
And it
doesn't stop there. For a more detailed list of questions you'll need to ask -
and have answered - read Ask Questions. And always watch out for
tell-tale signs of fraud.
Here's
how you can use the internet to help you invest wisely:
Start
With the SEC's EDGAR Database
The
federal securities laws require many public companies to register with the SEC
and file annual reports containing audited financial statements. For example,
the following companies must file reports with the SEC:
·
All U.S. companies with more than 500 investors and $10 million in net assets; and
·
All companies that list their securities on The Nasdaq Stock
Market or a major national stock exchange such as the New York Stock Exchange.
Anyone
can access and download these reports from the SEC's EDGAR database for free.
Before you invest in a company, check to see whether it's registered with the
SEC and read its reports.
But
some companies don't have to register their securities or file reports on
EDGAR. For example, companies raising less than $5 million in a 12-month period
may be exempt from registering the transaction under a rule known as
"Regulation A." Instead, these companies must file a hard copy of the
"offering circular" with the SEC containing financial statements and
other information. Also, smaller companies raising less than one million
dollars don't have to register with the SEC, but they must file a "Form
D." Form D is a brief notice which includes the names and addresses of
owners and stock promoters, but little other information. If you can't find a
company on EDGAR, call the SEC at (202) 942-8090 to find out if the company
filed an offering circular under Regulation A or a Form D. And be sure to
request a copy.
The
difference between investing in companies that register with the SEC and those
that don't is like the difference between driving on a clear sunny day and
driving at night without your headlights. You're asking for serious losses if
you invest in small, thinly-traded companies that aren't widely known just by
following the signs you read on Internet bulletin boards or online newsletters.
Contact
Your State Securities Regulators
Don't
stop with the SEC. You should always check with your state securities regulator
to see if they have more information about the company and the people behind
it. They can check the Central Registration Depository (CRD) and tell you
whether the broker touting the stock or the broker's firm has a disciplinary
history. They can also tell you whether they've cleared the offering for sale
in your state.
Check
with the NASD
The
National Association of Securities Dealers, Inc. can also give you a partial
disciplinary history on the broker or firm that's touting the stock.
Online
Investment Fraud:New Medium, Same Old Scam
The
types of investment fraud seen online mirror the frauds perpetrated over the
phone or through the mail. Remember that fraudsters can use a variety of
Internet tools to spread false information, including bulletin boards, online
newsletters, spam, or chat (including Internet Relay Chat or Web Page Chat).
They can also build a glitzy, sophisticated web page. All of these tools cost
very little money and can be found at the fingertips of fraudsters.
Consider
all offers with skepticism. Investment frauds usually fit one of the following
categories:
The
"Pump And Dump" Scam
It's
common to see messages posted online that urge readers to buy a stock quickly
or tell you to sell before the price goes down. Often the writers will claim to
have "inside" information about an impending development or to use an
"infallible" combination of economic and stock market data to pick
stocks. In reality, they may be insiders or paid promoters who stand to gain by
selling their shares after the stock price is pumped up by gullible investors.
Once these fraudsters sell their shares and stop hyping the stock, the price
typically falls and investors lose their money. Fraudsters frequently use this
ploy with small, thinly-traded companies because it's easier to manipulate a
stock when there's little or no information available about the company.
The
Pyramid
Be wary
of messages that read: "How To Make Big Money From Your Home
Computer!!!" One online promoter claimed that investors could "turn
$5 into $60,000 in just three to six weeks." In reality, this program was
nothing more than an electronic version of the classic "pyramid"
scheme in which participants attempt to make money solely by recruiting new
participants into the program.
The
"Risk-Free" Fraud
"Exciting,
Low-Risk Investment Opportunities" to participate in exotic-sounding
investments - such as wireless cable projects, prime bank securities, and eel
farms - have been offered through the Internet. But no investment is risk-free.
And sometimes the investment products touted do not even exist - they're merely
scams. Be wary of opportunities that promise spectacular profits or
"guaranteed" returns. If the deal sounds too good to be true, then it
probably is.
Off-shore
Frauds
At one
time, off-shore schemes targeting U.S. investors cost a great deal of money and
were difficult to carry out. Conflicting time zones, differing currencies, and
the high costs of international telephone calls and overnight mailings made it
difficult for fraudsters to prey on U.S. residents. But the Internet has
removed those obstacles. Be extra careful when considering any investment
opportunity that comes from another country, because it's difficult for U.S.
law enforcement agencies to investigate and prosecute foreign frauds.
Source: eagletraders.com
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