Watch out for internet fraudsters

By David McEwen

Monday 28th January 2002

The internet is a wonderful disseminator of information but some investors are being taken to the cleaners because they believe everything they read.

The Securities and Exchange Commission, a major US investment watchdog, has put out a warning about internet-based scams (on its home page of course - www.sec.gov).

It points out that the Net allows inept advisers or outright fraudsters to contact tens of thousands of potential customers all over the world at the push of a button. Using fancy web site graphics, they can put on the appearance to success, size and stability.

Here are some areas where fraudsters are common.

Online investment newsletters

There are hundreds of newsletters out there and some are very good. However, others are not above taking payment from companies to recommend their shares. This is not illegal in many countries, but the authors are supposed to disclose who paid them and how much.

Not surprisingly, many fraudsters hide such information or lie about it as well as their independence, research skills and track records.

Bulletin boards

Online bulletin boards are an increasingly popular way for investors to share information. Unfortunately, fraudsters often try to inflate a company's share price by putting out false rumours or revealing "inside" information. Some go as far as to log on under different aliases, giving the appearance that the hot tip is being picked up by others.

Email spams

These are broadcast emails, sometimes to millions of people at a time, offering suspect investments or services.

Online pyramid schemes

These start with unsolicited emails saying something like "How To Make Big Money From Your Home Computer!!!" Participants have to send off money to the author and start sending their own emails to find new people who will send money to them.

The "Risk-Free" Fraud

Fraudsters have found that claiming an investment is low risk can open wallets. Thousands of investors have taken the bait, even when high-risk ventures like wireless cable projects have been offered. Sometimes the investment products touted do not even exist - any money you send goes into somebody else's back pocket.

Offshore Frauds

Some promoters say there is big money to be made by investing in a hot project in a third world country. Not only are details hard for the potential investor to check, but trying to prosecute or recover your money from someone in another country is extremely difficult.

The SEC says the best way to avoid falling into an online investment trap is to stick to 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," it says.

The best way to avoid getting burnt is to ignore any investment opportunities or advice from someone whose credentials cannot be independently verified.

Beware of outfits with a bland name such as Associated International Investments. Trying to find anything out about such outfits through a search engine with such common terms is nigh on impossible. Make sure you find the information you need, then study the company doing the recommending and the shares being tipped. That way you can make up your own mind.

David McEwen is an investment adviser and author of weekly share market newsletter McEwen's Investment Report. He is commissioned by the New Zealand Stock Exchange to write an independent personal investment column. He can be reached by email at davidm@mcewen.co.nz

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