Stock Scams Go Online

Old-fashioned stock swindles are getting new life on the Internet, and that's the subject of a Capitol Hill hearing Monday.

Amateur investors will tell a Senate panel their stories about getting taken by Internet stock scams.

Galen O'Kane is one of them. An Internet investment newsletter gave a business startup a glowing promotion, so O'Kane pumped in a hefty chunk of his savings.

But when he tried to visit the company, Electro-Optical Systems Corp., outside Boston, O'Kane found an empty building: no manufacturing plant, no workers.

O'Kane, 39, an electrical engineer from Ellsworth, Maine, and an investor fleeced in another case planned to testify Monday.

The Internet "has offered consumers substantially greater access to financial information and investment opportunities," said Sen. Susan Collins, R-Maine, chairwoman of the Senate Governmental Affairs subcommittee on investigations.

"However, I am concerned that the Internet appears to provide 'cybercrooks' with equally profound avenues for committing financial fraud," Collins said. "(It) gives some consumers a false sense of security, credibility and control regarding their investments."

O'Kane fell victim to a classic "pump and dump" scheme, where promoters push up a stock's price by making false claims about the company, later to sell their own shares to cash in on the artificially high price.

In the case of Massachusetts-based Electro-Optical, which was supposed to have been a manufacturer of fingerprinting devices, promoters allegedly made at least $5 million from such fraudulent share sales, according to a civil lawsuit filed by the Securities and Exchange Commission in 1998. The defendants were alleged to have pushed the stock price in one day from between 25 and 50 cents to more than $5 a share.

Like traditional investment scams, cyberspace scams usually involve small-company stocks that are relatively cheap, risky and thinly traded. Some companies portray themselves as Internet businesses.

The difference now is that stocks can be promoted fraudulently in Internet junk mail, online newsletters, electronic "chat rooms" and World Wide Web sites. Because the Internet is everywhere, unscrupulous stock promoters anywhere in the world can cloak themselves in anonymity and lure investors across America.

That means real headaches for international, federal and state securities regulators, who must pursue fraud, coordinate their efforts and educate investors about the risks, according to a new report by congressional investigators.

The rapid growth in online securities fraud "could ultimately place a significant burden on the regulators' limited investigative staff resources and thereby limit the agencies' capacity to respond effectively," the General Accounting Office said in a report prepared for Monday's Senate hearing.

Also scheduled to testify at the hearing was Thomas Gardner, a founder of The Motley Fol, a respected investment information service. Gardner believes the key factor allowing Internet securities fraud to flourish is investor ignorance.

"If people knew enough not to make investment decisions based upon tips, rumors and touts and did their homework, they would not fall for most stock frauds on the Internet or otherwise," he said in prepared testimony.