Spotting Investment Fraud

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.

  1. Online Investment Newsletters.
    Some companies pay the people who write online newsletters cash or securities to "tout" or recommend their 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.
  2. Bulletin Boards.
    Online bulletin boards - whether newsgroups, usernet, or web-based bulletin boards - have become an increasingly popular forum for investors to share information. 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. 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.
  3. 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.
  4. Costs may not always be obvious.
    Even if online brokerage costs are lower than those of full-service brokers, they can still add up, particularly if you do a lot of buying and selling. Online brokerages firms also impose a number of other fees and charges that you should study closely. The federal capital gains tax is also something with which you must reckon. Before you start buying and selling stocks or mutual funds online on a large scale, you should give careful thought to what the tax bite would be as a result of such trading.

Tips that you can use to avoid such situations include:

  • Find out whether the newsletter received payment to "tout" or recommend the stock and, if so, what it received and from whom.

  • Read carefully what the newsletter says about payments it receives.

  • Independently investigate the company or investment opportunity.

  • Check with the SEC or your state securities regulator to see if the newsletter has ever been in trouble.