The “information highway” can quickly become the road to ruin for some unwitting investors, according to Stephen Harbeck, president of the Securities Investor Protection Corporation (SIPC). In a conference call held by SIPC, together with Robert Webster, public information officer for the North American Securities Administrators Association (NASAA), Harbeck spoke of an Internet fraud scheme in which con artists pose as legitimate brokerage firms and registered members of SIPC.
“Investors need to refer to the age-old axiom—if it sounds too good to be true, it is too good to be true,” said Steve Harbeck. “That’s our first line of defense.” Harbeck says the most common scheme is a waiting game, in which cons create a website under a legitimate firm name—changing only the address—use registered broker’s names, and wait for investors to contact them for business. “The cons even encourage the investor to verify the firm and broker names on the SIPC website,” said Harbeck.
Some of the schemes simply have the con taking investor funds for the sale of a fictitious security, and then vanishing. A more elaborate scheme being perpetrated involves the con artist contacting a shareholder in a thinly traded security with an offer to buy their shares at an attractive price, saying they are trying to gain a controlling share in the company. The hook occurs when the investor is instructed to wire transfer a “good faith deposit” to the buyer first. The con then disappears, only to contact the seller later with some excuse for not completing the purchase. Harbeck says a common excuse for the failure is “the SEC has rejected the trades,” but is often more creative—“the buyer has contracted cholera.”
So far, the scheme has produced relatively small gains, but that could be the strategy. “These cons are trying to steal small amounts, mostly between $5,000 and $20,000, from lots of people,” said Harbeck, adding that in the past year, $122 million was lost to Internet fraud schemes. “Experience tells us that most investors who lose money never follow up with a regulatory authority. So, we believe that the complaints we are seeing are just the tip of an iceberg,” added Harbeck.
The preponderance of these schemes has greatly accelerated in the past six months according to the watchdogs, but evidence of its existence has been around for about a year. “Once you get conned, your name goes on a list that gets passed around to other cons,” says Harbeck, who points out that investors and firms, for the most part, must protect themselves.
The majority of these schemes rely on the momentary suspense of good judgment on the part of investors. Bob Webster quips, “if the deal can’t be beat, hit delete. Don’t be dot-conned.” The SIPC and other regulatory agencies have their hands tied with activity outside the law, admits Harbeck, so the onus is on investors and brokerage firms to be suspicious of unsolicited contact and aware of the potential for identity theft on the Internet. Harbeck advised brokerage firms to continually monitor the Internet for misuse of their name. Harbeck recommends that individual investors use the NASD website and it’s “broker search” database of all registered brokers and firms.
SIPC offers fraud education on its website www.sipc.com and provides links to state and federal regulatory agencies for investors with information or concerns regarding fraud.
No names of firms or individuals—or the aggregate amount of money lost—were released. Harbeck stated that federal and state regulators were investigating the schemes and it wouldn’t be prudent to release details. E-mail John Churchill
