Dot Conned
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
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